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Commercial 
Banking  Practice 

under  the 

Federal  Reserve  Act 


■--a^ 


National  Bank  of  Commerce 

inNewYork 


Revised  to  October,  1921 


Commercial 
Banking    Practice 


under   the 


Federal  Reserve  Act 


The  Lazv  and  the  Regulations, 
Rulings  and  Opinions  of  Counsel 
of  the  Federal  Reserve  Board 
Governing  Bank  Acceptances, 
Rediscounts,  Advances  and 
Open  Market  Transactions  of 
the    Federal    Reserve    Banks 


Third  Edition 
Revised  to  October,   1921 


National  Bank  of  Commerce 

))  in  New  York 


/-/G-/6/6 


Copyright  1921 

National  Bank  of  Commerce 
in  New  York 


Foreword 

TN  Commercial  Banking  Prac- 
-'"  tice  it  has  been  the  purpose 
of  the  National  Bank  of  Com- 
merce in  New  York  to  present 
a  reference  manual  in  convenient 
form  for  the  use  of  business  men 
and  bankers.  This  edition  is  the 
third  to  be  issued  since  1917,  and 
has  been  revised  to  include  new 
and  modified  rulings  of  the 
Federal  Reserve  Board. 

James  S.  Alexander 

President 


<4-  VJ  wi^  "^  «-'  '^ 


CONTENTS 

Part  I.     Bank  Acceptances  Page 

Acceptances    7 

General   Statutory   Provisions 9 

Bank  Acceptances  Based  on  Imports    and    Exports 11 

Bank  Acceptances  Based  on  Domestic  Shipments  of  Goods.. 32 

Bank  Acceptances  Secured   by   Warehouse   Receipts 43 

Bank  Acceptances  Executed  to  Furnish  Dollar  Exchange.  ..  .53 
Letters  of  Credit  and  Acceptances  Issued  for  Correspondents.  .59 
Investment  in  Bank  Acceptances  by  National  Banks 64 

Part  II.     Rediscounts  with  Federal  Reserve  Banks 

General    Statutory    Provisions 69 

General  Regulations  of  Federal  Reserve  Board 73 

Rediscount  of  Promissory    Notes 77 

Rediscount  of  Drafts  and  Trade  Acceptances 107 

Rediscount  of  Six   Months'   Agricultural   Paper 125 

Rediscount  of  Bank    Acceptances 134 

Part  III.     Advances  by  Federal  Reserve  Banks 

General   Statutory    Provisions 149 

General  Regulations  of  Federal  Reserve  Board 149 

Security    150 

Maturity    151 

Part  IV.     Open  Market  Transactions 

General    Statutory    Provisions 153 

General  Regulations  and  Rulings 153 

Eligible  Bills  and  Acceptances 157 

Ineligible  Bills  and  Acceptances 158 

Requirement   of   Statements 159 

Maturity   160 

Indorsement    ..161 

Appendix:     Acceptance    Powers    of    International    Financial 

Corporations 165 

Index 170 


AUTHORITIES 


This  book  has  been  compiled  from  the  following 
official  sources: 

Federal  Reserve  Act 

National  Bank  Act 

War  Finance  Corporation  Act 

Regulations  of  the  Federal  Reserve  Board 

Federal  Reserve  Bulletin 


First  Edition,  July,  1917 

Second  Edition,  October,  1918 

Third  Edition,  October,  1921 


PART  I. 


Bank  Acceptances 

The  term  "acceptance"  designates  a  draft  or  bill  j^^'"**^*" 
of  exchange  drawn  to  order,  payable  at  a  definite 
time  after  date  or  sight,  the  obhgation  to  pay  which 
has  been  accepted  by  an  acknowledgment  thereon 
written  or  stamped  and  signed  (generally  across 
the  face  of  the  instrument)  by  the  party  on  whom 
the  bill  is  drawn.  This  acknowledgment,  which  gen- 
erally consists  merely  of  the  word  "accepted"  fol- 
lowed by  signature  and  date,  constitutes  the  agree- 
ment of  the  acceptor  to  pay  the  draft  at  maturity 
according  to  its  tenor,  without  qualifying  condi- 
tions. To  be  negotiable,  such  an  accepted  bill  must 
be  for  a  definite  amount  and  must  be  payable  in 
money. 

An  ordinary  "trade  acceptance"  is  created  when, 
for  example,  the  seller  of  merchandise  draws  a  draft 
for  the  purchase  price  on  the  purchaser  and  the  pur- 
chaser accepts  the  draft.  The  purchaser,  however, 
may  enter  into  an  agreement  with  his  bank  whereby  Bank  acceptance 
the  bill  is  drawn  on  the  bank  and  is  accepted  by  it 
for  his  account  instead  of  by  the  purchaser  himself. 
Such  a  draft,  when  accepted,  becomes  a  "bank  ac- 
ceptance." The  Federal  Reserve  Board  has  defined 
a  bank  acceptance  as  "a  draft  or  bill  of  exchange 
...  of  which  the  acceptor  is  a  bank  or  trust  com- 
pany, or  a  firm,  person,  company,  or  corporation  Definibon 
engaged  generally  in  the  business  of  granting  bank- 
ers' acceptance  credits." 


Commercial     Banking     Practice 


Use  of 

bank 

acceptances 


Coverlure  of 
acceptances 


Acceptance  of 
eligible  bills 


Bank  acceptances  are  used  largely  in  financing 
international  trade  and  domestic  transactions  in- 
volving major  staple  commodities.  They  hold  a 
preeminent  place  among  credit  instruments  and 
offer  a  means  of  investment  in  which  the  credit  risk 
has  practically  been  eliminated.  This  is  due  to  the 
fact  that  direct  responsibility  for  their  payment 
rests  on  banking  institutions  whose  credit  is  gen- 
erally and  widely  known. 

At  a  meeting  of  the  leading  banks  and  bankers 
of  New  York,  Boston,  Philadelphia,  and  other 
cities,  held  at  the  National  Bank  of  Commerce  in 
New  York,  August  14,  1918,  it  was  resolved  that: 

"The  accepting  bank  shall  require  from  its  clients 
that  it  be  placed  in  funds  to  meet  acceptances  on 
day  of  maturity  either  by 

"(a)  The  deposit  of  clearing  house  funds  one 
day  prior  to  maturity,  or 

"(b)  The  deposit  of  cash  or  check  on  the  Federal 
Reserve  Bank  of  New  York  on  the  day  of 
maturity,  or 

"(c)  Debit  to  the  account  of  the  bank's  client  on 
day  of  maturity  against  funds  cleared  on, 
or  prior  to,  such  date." 

Since  accepting  banks  do  not  ordinarily  accept 
bills  other  than  those  which  are  eligible  for  redis- 
count or  purchase  at  Federal  reserve  banks,  those 
subdivisions  of  Parts  II  and  IV  which  relate  to  the 
rediscount  and  purchase  of  bank  acceptances  (pages 
134-148  and  153-163,  below)  should  be  read  in  con- 
nection with  Part  I. 


General  Statutory  Provisions 

Any  member  bank  may  accept  drafts  or  bills  of  Jj'JffJJ'*^^ 
exchange  drawn  upon  it  having  not  more  than  six 
months'  sight  to  run,  exclusive  of  days  of  grace, 
which  grow  out  of  transactions  involving  the  im-  ^^"^''0™$°'*' 
portation  or  exportation  of  goods;  or  which  grow  Against  domestic 
out  of  transactions  involving  the  domestic  shipment  '  ''"'^" 
of  goods  provided  shipping  documents  conveying  or 
securing  title  are  attached  at  the  time  of  acceptance ; 
or  which  are  secured  at  the  time  of  acceptance  by  Against  warehoused 
a  warehouse  receipt  or  other  such  document  con-  '*^p'" 
veying  or  securing  title  covering  readily  marketable 
staples.    No  member  bank  shall  accept,  whether  in  Umiton 
a  foreign  or  domestic  transaction,  for  any  one  per-  acceptances 

o  'jx  for  one 

son,  company,  firm,  or  corporation  to  an  amount  interest 
equal  at  any  time  in  the  aggregate  to  more  than  ten 
per  centum  of  its  paid-up  and  unimpaired  capital 
stock  and  surplus,  unless  the  bank  is  secured  either 
by  attached  documents  or  by  some  other  actual 
security  growing  out  of  the  same  transaction  as  the 
acceptance;  and  no  bank  shall  accept  such  bills  to  Limit  on  aggregate 
an  amount  equal  at  any  time  in  the  aggi'egate  to  ^"^p*^"' 
more  than  one-half  of  its  paid-up  and  unimpaired 
capital  stock  and  surplus :  Provided^  however ^  That  Extension  of 
the   Federal  Reserve  Board,  under  such  general   ""* 
regulations  as  it  may  prescribe,  which  shall  apply 
to  all  banks  alike  regardless  of  the  amount  of  cap- 
ital stock  and  surplus,  may  authorize  anj^  member 
bank  to  accept  such  bills  to  an  amount  not  exceed- 
ing at  any  time  in  the  aggregate  one  hundred  per 
centum  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus:  Providedjurtker,  That  the  aggregsiie  Lbiit  on  aggregate 
of  acceptances  growing  out  of  domestic  transac-  domestic  acceptances 


10 


Commercial     Banking     Practice 


Acceptances  for  dollar 
exchange 


Acceptances  for  one 
bank  Ibnited 


Limit  on 

aggregate  of  such 
acceptances 


tions  shall  in  no  event  exceed  fifty  per  centum  of 
such  capital  stock  and  surplus. 


Any  member  bank  may  accept  drafts  or  bills  of 
exchange  drawn  upon  it  having  not  more  than  three 
months'  sight  to  run,  exclusive  of  days  of  grace, 
drawn  under  regulations  to  be  prescribed  by  the 
Federal  Reserve  Board  by  banks  or  bankers  in  for- 
eign countries  or  dependencies  or  insular  posses- 
sions of  the  United  States  for  the  purpose  of  fur- 
nishing dollar  exchange  as  required  by  the  usages 
of  trade  in  the  respective  countries,  dependencies, 
or  insular  possessions.  .  .  .  Provided,  however, 
That  no  member  bank  shall  accept  such  drafts  or 
bills  of  exchange  referred  to  in  this  paragraph  for 
any  one  bank  to  an  amount  exceeding  in  the  aggre- 
gate ten  per  centum  of  the  paid-up  and  unimpaired 
capital  and  surplus  of  the  accepting  bank  unless  the 
draft  or  bill  of  exchange  is  accompanied  by  docu- 
ments conveying  or  securing  title  or  by  some  other 
adequate  security:  Provided,  further.  That  no 
member  bank  shall  accept  such  di'afts  or  bills  in  an 
amount  exceeding  at  any  time  the  aggregate  of  one- 
half  of  its  paid-up  and  unimpaired  capital  and  sur- 
plus. 

(Federal  Reserve  Act,  Section  18.) 


Bank  Acceptances  Based  on  Imports 
and  Exports 

CHARACTER 
Statutory   Provisions 

Any  member  bank  may  accept  drafts  or  bills  of  Acceptaneai 
exchange  dra\\Ti  upon  it    .    .    .    which  grow  out  of  bade 
transactions  involving  the  importation  or  exporta- 
tion of  goods. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

Datermination  of  Character  of  Transactioivs  on  Which  Accspt- 
ancex  Are  Based. 

Held  not  to  be  necessary'-  that  the  specific  goods  identification 
covered  by  an  acceptance  based  upon  an  import  or  goods  not 
export  transaction  must  be  identified  at  the  time  of  '^^^ 
the  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1915,  page 
405.  See  also  Regulation  A,  Series  of  1920,  B,  pages 
135-137,  below.) 

Good  faith  must  be  relied  upon  to  a  large  extent  Good  faith 
in  determining  whether  an  acceptance  is  based  upon 
a  transaction  involving  the  importation  or  exporta- 
tion of  goods.  A  member  bank  would  be  justified 
in  putting  on  the  legend  "this  acceptance  is  based 
on  a  transaction  involving  the  importation  or  ex- 
portation of  goods,"  provided  it  is  satisfied  the  state- 
ment by  its  customer  is  made  in  good  faith. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1915,  page 
406.) 

The  Federal  reser\^e  bank  reserves  the  right  to  ask  Substantiation 
State  member  banks  for  evidence  underlying  the  assurance, 
certification  given  to  it,  and  the  bank  examiner  may 


BankAcceptances  13 

require  evidence  from  the  national  bank.  Member 
banks  would,  therefore,  best  protect  themselves  by 
stipulating  for  themselves  the  right  at  times  to  ask 
for  substantiation  of  the  assurances  given  by  their 
customers. 

(Ruling,  Federal  Reserve  Bulletin,  December,   1915,  page 
406.) 

Transaction  Must  Itself  Involve  Import  or  Export  of  Goods. 

A  transaction,  in  order  to  be  the  basis  of  a  draft  Transactions 
or  bill  eligible  for  acceptance  by  a  member  bank,  oHm^rtw' 
must  itself  involve  the  importation  or  exportation  export  not 

in'i  1  o     ^        sufficient 

of  goods.    A  transaction  wholly  independent  oi  the  basis 
transaction  covering  the  importation  or  exportation 
of  goods  is  not  sufficient  basis  for  an  acceptance, 
under  the  terms  of  section  13  (relating  to  accept- 
ances against  imports  or  exports) . 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1915,  page  276.) 

Where  the  contract  between  a  seller  of  goods  who  ^"ft" 
draws  a  draft  and  the  purchaser  is  entirely  inde-  drawn  in 
pendent  of  the  contract  for  the  export  of  the  goods,  f^gaJb-on, 
the  draft  would  have  to  be  treated  as  drawn  in  a 
domestic  transaction  and  would  have  to  be  accom- 
panied by  shipping  documents  or  secured  by  ware- 
house receipts  or  other  similar  documents  conveying 
and  securing  title  when  accepted  by  the  drawee 
bank. 

(Rilling,  Federal  Reserve  Bulletin,  May,  1918,  page  435.) 

A  draft  drawn  by  an  importer  of  goods  for  the  importers' 
purpose  of  procuring  funds  with  which  to  pay  the  money 
foreign  seller  of  those  goods  is  eligible  for  accept-  ^^^^' 
ance  by  a  member  bank  whether  or  not  the  bill  of 
lading  covering  the  goods  is  attached  to  the  draft 
and  whether  or  not  the  goods  have  actually  been 


1*  Commercial     Banking     Practice 

shipped  by  the  seller  at  the  time  the  draft  is  drawn. 
In  such  a  case,  that  is,  where  there  has  been  an 
actual  sale  of  goods  for  export,  the  draft  which  is  to 
procure  funds  with  which  to  paj^  for  those  goods  is 
one  which  clearly  grows  out  of  a  transaction  involv- 
ing the  importation  of  goods  within  the  meaning 
of  section  13,  and  as  such  is  eligible  for  acceptance 
by  a  member  bank,  provided,  of  course,  that  it  com- 
plies in  other  respects  with  the  terms  of  the  law  and 
the  regulations  of  the  Federal  Reserve  Board. 

This  ruling  is  not  intended  in  any  way  to  apply 
to  the  case  of  a  draft  drawn  by  an  American  manu- 
facturer for  the  purpose  of  financing  the  purchase 
of  goods  not  from  a  foreign  seller  but  from  an 
American  importer. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1920,  page 
162.) 

Intention  Drafts  drawn  under  an  agreement  whereby  the 

notTufficient  drawer  agrees  to  manufacture  and  import  into  the 

'""•  United  States  in  time  to  meet  the  maturity  of  such 

drafts  certain  products  which  shall  have  been  sold 
by  the  shipper  and  are  to  be  ready  for  immediate 
delivery  and  consigned  to  a  firm  of  bankers  pro- 
curing the  acceptance  of  such  drafts  for  the  drawer 
are  not  eligible  for  acceptance  by  member  banks; 
since  they  do  not  grow  out  of  "transactions  involv- 
ing the  importation  or  exportation  of  goods"  within 
the  meaning  of  section  13  of  the  Federal  Reserve 
Act.  In  the  absence  of  shipping  documents  and 
warehouse  receipts  securing  such  drafts  they  could 
not  be  accepted  as  drawn  in  a  domestic  transaction. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  October, 
1918,  page  976.  See  also  Regulation  A,  Series  of  1920,  B, 
pages  136-137,  below.) 


BankAcceptancbs  16 

If  a  drawee  bank  accepts  at  the  instance  of  the  Acceptance 
purchaser  of  goods,  the  purchaser  having  a  contract  of  wp^er 
to  export  such  goods,  the  drafts  would  grow  out  of 
a  transaction  involving  the  export  of  goods  and 
could  be  accepted  by  the  drawee  bank  under  author- 
ity of  section  13. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1918,  page  435.) 

AVhere  a  domestic  corporation  "A"  enters  into  J^*^*""^ 
a  contract  "vvith  another  domestic  corporation  "B"  ultimately 
to  furnish  material  to  be  used  by  "B"  in  the  manu-  C^lu"*"^"* 
facture  of  products  which  "B"  is  under  contract  to 
export,  the  mere  fact  that  the  material  furnished  is 
ultimately  intended  for  export  in  some  form  cannot 
be  said  to  merge  the  two  transactions  into  one.    The 
transaction  between  "A"  and  "B"  could  not  be  said 
to  involve  the  exportation  of  goods. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1915,  page  276.) 

The  mere  fact  that  the  drawer  is  manufacturing  Contract  to 

1  export 

goods  which  he  intends  ultimately  to  export  does 
not  alone  bring  it  within  the  scope  of  a  transaction 
involving  the  exportation  of  goods.  The  person  for 
whom  the  draft  is  accepted  must  have  a  definite 
bona  fide  contract  for  the  shipment  of  the  goods 
within  a  specified  and  reasonable  time. 

(Opinion  of  Counsel,  Federal   Reserve  Bulletin,   January, 
1920,  page  66.) 

National  banks  cannot  accept  drafts  for  the  pur-  Acceptance. 

J  J.        against 

pose  of  enabling  domestic  concerns  to  extend  credits  open  accounu 
on  open  account  to  foreign  purchasers. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1919,  page  253.) 

An  acceptance  house  which  has  purchased  an  ac-  Drafts  ^^^^ 

,  .  «  against 

ceptance  based  on  the  importation  or  exportation  collateral  of 
of  goods  desires  to  reimburse  itself  by  drawing  a  »«"?**""• 
bill  upon  a  national  bank,  pledging  as  collateral 


16 


Commercial     Banking     Practice 


Ineligible 
for  acceptance 


Acceptance 
secured  by 
documentary 
drafts 


Goods  purchased 
subsequent  to 
acceptance 


security  for  the  bill  the  original  acceptance.  It  is 
held  that  the  new  bill  cannot  properly  be  said  to 
grow  out  of  the  original  export  transaction  in  the 
sense  contemplated  by  the  Federal  Reserve  Act. 

A  national  bank  is  not  authorized  to  accept  a 
draft  drawn  under  the  above  circumstances  because 
it  is  not  an  acceptance  growing  out  of  a  transaction 
involving  the  importation  or  exportation  of  goods, 
nor  drawn  by  a  bank  or  banker  located  in  a  foreign 
country,  nor  does  it  grow  out  of  a  transaction  in- 
volving the  domestic  shipment  or  storage  of  goods. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1917,  page  29.) 

A  draft  drawn  upon  a  national  bank  which  is 
secured  by  a  documentary  draft  drawn  by  the  same 
drawer  upon  a  foreign  buyer  is  eligible  for  accept- 
ance by  the  national  bank.  However,  no  bank 
which  has  purchased  a  foreign  documentary  draft 
may  refinance  itself  by  drawing  a  draft  on  a  mem- 
ber bank  secured  by  the  documentary  draft.  If, 
however,  the  seller  or  shipper  of  goods  draws  a 
draft  upon  the  foreign  buyer  or  consignee  payable 
abroad  and  secured  by  shipping  documents,  it  is 
proper  for  the  drawer  to  finance  that  shipment  by 
a  banker's  acceptance  secured  by  that  documentary 

draft. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1920,  page  610.) 

Acceptance  of  Drafts  Prior  to  Purchase  or  Sale  of  Goods  Im- 
ported or  Exported. 

In  interpreting  the  word  "involved"  in  connec- 
tion with  the  importation  or  exportation  of  goods, 
upon  which  an  acceptance  has  been  based,  it  is  held 
that  goods  may  be  purchased  and  shipped  subse- 
quent to  the  time  of  the  first  acceptance,  provided 
that  there  is  a  definite  bona  fide  contract  for  the 


BankAcceptances  17 

shipment  of  the  goods  within  a  specified  and  reason- 
able time. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1915,  page 
405.) 

Section  13  of  the  Federal  Reserve  Act  is  con-  Delay  in 
strued  to  justify  a  national  bank  in  accepting  a  fmmteriai 
draft  drawn  upon  it  in  settlement  of  advances  for 
cotton   being  accumulated   by   cotton   buyers   for 
export.  The  fact  that  there  is  a  temporary  delay  in 
actual  shipment  of  goods  is  immaterial. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1916,  page 
458.) 

A  national  bank  may  properly  accept  a  draft,  Acceptances 
drawn  for  the  purpose  of  importing  goods  whether  importations 
or  not  the  sale  of  the  goods  under  consideration  has  °'  2*^'^* 
actually  been  consummated  at  the  time  of  the  ac- 
ceptance of  the  draft,  if  the  accepting  bank  is  as- 
sured that  the  proceeds  of  the  draft  will  ultimately 
be  used  solely  for  the  purpose  of  financing  a  trans- 
action involving  the  importation  of  goods.  It  is  not 
necessary  that  the  goods  to  be  sold  be  identified  at 
the  time  of  acceptance.    The  accepting  bank,  how- 
ever,  must   be  reasonably   sure   that  the   draft   is 
drawn  for  the  purpose  of  financing  a  transaction  in- 
volving the  importation  or  exportation  of  goods, 
and  that  its  proceeds  will  be  used  for  that  purpose. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1917,  page  527.) 

A  member  bank  would  be  justified,  if  fully  se-  Export  contract 
cured,  in  accepting  drafts  dra^^Ti  by  a  local  cotton- 
buying  firm  having  a  contract  to  sell  to  foreign  buy- 
ers if  the  transaction,  after  having  been  made  in 
good  faith,  ultimately  resulted  in  the  sale  of  the 
cotton  to  an  American  instead  of  a  foreign  pur- 
chaser. It  was  assumed  in  connection  with  this  in- 
terpretation of  section  13  that  the  bank  had  received 


18 


Commercial     Banking     Practice 


Stipulations 
essential 
to  eligibility 
at  reserve 
banks 


permission  from  the  Board  to  accept  drafts  or  bills 
of  exchange  drawn  upon  it ;  that  the  cotton  buyers 
had  a  contract  to  sell  cotton  to  a  firm  of  Liverpool ; 
that  they  held  the  cotton  subject  to  shipping  re- 
ceipt of  the  Liverpool  firm;  and  that  because  of 
freight  rates  and  shipping  conditions  the  Liverpool 
firm  changed  its  policy  and  directed  the  sale  of  the 
cotton. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1916,  page 
13.) 

Acceptance  Agreements  of  Dealers  in  Same  Goo<Is  for  Export 
and  Domestic  Sale. 

If  dealers  purchasing  or  producing  the  same  class 
of  goods  both  for  export  and  domestic  sale  wish  to 
finance  their  export  transactions  by  means  of  eligi- 
ble bankers'  acceptances,  the  Board  suggests  that 
the  contracts  between  such  dealers  and  their  accept- 
ing banks  contain  the  following  provisions,  (a)  that 
the  dealer  has  entered  into  contracts  providing  for 
the  exportation  of  goods  of  a  specified  amount 
within  a  specified  and  reasonable  time;  (b)  that  the 
total  amount  of  drafts  drawn  by  the  dealer  under 
credits  opened  to  finance  the  exportation  of  such 
goods  shall  at  no  time  exceed  the  aggregate  amount 
of  the  export  transactions  contracted  for  and  in 
process  of  execution ;  (c)  that  the  proceeds  of  drafts 
drawn  against  the  accepting  bank  under  this  credit 
will  be  used  to  consummate  the  export  contracts 
referred  to,  that  the  dealer  will  furnish  in  due 
course  to  the  accepting  bank  shipping  documents 
covering  such  goods,  and  that  the  proceeds  of  the 
sale  of  the  goods  exported  will  be  applied  in  liqui- 
dation of  the  acceptance  credit. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1921,  page 
70.) 


BankAcceptances  19 

Acceptances  Against  Coin  and  Bullion. 

Gold  coin  is  "goods"  within  the  meaning  of  sec-  Gold  coin 
tion  13  of  the  Federal  Reserve  Act. 

(Ruling,   Federal   Reserve   Bulletin,   January,    1917,   page 
29.) 

Gold  bars  may  be  properly  considered  as  goods.  Bullion 

(Ruling,   Federal   Reserve   Bulletin,   January,    1917,   page 
29.) 

MATURITY 

Statutory   Provisions 

Any  member  bank  may  accept  drafts  or  bills  of  Maturity 
exchange  drawn  upon  it  having  not  more  than  six 
months'  sight  to  run,  exclusive  of  days  of  grace. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

A  national  bank  is  held  to  be  authorized  to  enter  Duration  of 
into  an  agreement  having  more  than  six  months  to  credfis 
run,  by  the  terms  of  which  it  obligates  itself  for  a 
period  of  time  specified  in  the  agreement  to  accept 
drafts  drawn  upon  it,  provided  such  drafts  grow 
out  of  transactions  involving  the  importation  or 
exportation  of  goods,  and  that  the  individual  drafts 
have  not  more  than  six  months'  sight  to  rim.  This 
distinction  is  emphasized:  "While  a  letter  of  credit 
or  credit  agreement  may  lawfully  be  made  by  a 
national  bank  which  will  extend  by  its  terms  for  a 
period  exceeding  six  months,  the  agreement  must 
not  be  of  such  a  character  as  will  impose  upon  the 
holders  of  drafts  accepted  thereunder  any  obliga- 
tion to  renew  such  drafts  so  that  the  period  of  ac- 
ceptance shall  exceed  six  months  in  duration  as  to 
any  specified  draft." 

(Ruling,  Federal  Reserve  Bulletin,  September,   1915,  page 
269.) 

There  is  no  objection  to  a  national  bank's  agree- 


20 


Commercial     Banking     Practice 


Determination 
of  maturity 


Statement 
of  case 


Basis  of 
acceptances 


ing  in  advance  to  accept  drafts  aggregating  certain 
amounts  for  a  period  of  more  than  six  months,  but 
each  individual  draft  drawn  under  a  credit  of  that 
character  must  comply  with  the  provisions  of  the 
law  relating  to  the  acceptance  of  the  original  draft. 
(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  January, 
1920,  page  67.) 

Where  a  six  months'  credit  is  required  it  is  im- 
proper to  grant  that  credit  by  means  of  two  three 
months'  acceptances  for  the  purpose  of  making  the 
acceptances  at  all  times  eligible  for  rediscount  by 
Federal  reserve  banks.  On  the  other  hand,  the 
period  covered  by  an  acceptance  should  not  be  in 
excess  of  that  which  is  usual  and  reasonably  neces- 
sary to  finance  the  underlying  transaction. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1921,  page  308.) 

A  national  bank  makes  acceptances  covering  the 
importation  of  automobile  parts  from  France,  with 
a  maturity  of  ninety  days,  which  is  supposed  to  be 
sufficient  to  cover  payment  for  the  merchandise  in 
France,  its  transit  to  New  York,  its  warehousing, 
and  subsequent  sale  from  warehouse.  It  is  found, 
however,  that  before  the  transaction  has  been  com- 
pleted by  the  sale  of  the  merchandise,  the  ninety-day 
period  has  expired,  although  the  parts  had  already 
arrived  and  were  stored  pending  resale.  The  ques- 
tion is  on  the  propriety  of  making  renewal  accept- 
ances to  finance  the  storage  and  resale. 

Automobile  parts  can  not  be  regarded  as  readily 
marketable  staples  within  the  meaning  of  section 
13.  Consequently,  if  the  drafts  are  to  be  secured 
by  warehouse  receipts  covering  the  automobile 
parts,  that  fact  would  not  of  itself  make  the  drafts 
eligible  for  acceptance  by  national  banks.  The 
drafts  are  eligible  for  acceptance  only  if  and  upon 


BankAcceptances  21 

the  ground  that  they  can  be  said  to  grow  out  of 
the  importation  of  the  automobile  parts  within  the 
intent  of  section  13. 

The  Board  is  of  the  opinion  that  where  the  goods  ^^*^"**J^j'" 
have  come  into  the  possession  of  the  importer  in  transactions 
the  United  States,  who  is  the  taker  of  the  credit, 
the  transaction  involving  the  importation  of  those 
goods  must  be  considered  so  far  concluded  as  to 
preclude  the  issuance  of  a  renewal  draft  based  upon 
that  transaction.  The  Board  is  of  the  opinion, 
therefore,  that  upon  the  facts  stated  the  renewal 
drafts  would  be  ineligible  for  acceptance  by 
national  banks. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1921,  page  699.) 

The  acceptance  of  a  private  banking  house  made  Renewals 
for  a  bag  company,  stating  in  the  body  of  the  draft  imports 
that  it  is  for  burlap  from  Calcutta  stored  on  the  ""'^"'='" 
docks,  might  be  continued  or  renewed  while  the 
goods  are  on  the  docks. 

(Ruling,   Federal   Reserve   Bulletin,   January,    1917,   page 
30.) 

AMOUNT  BANK  MAY  ACCEPT  FOR  ONE  INTEREST 

Statutory  Provisions 

No  member  bank  shall  accept,  whether  in  a  for-  Ten  per 
eign  or  domestic  transaction,  for  any  one  person,  \^i 
company,  firm,  or  corporation  to  an  amount  equal 
at  any  time  in  the  aggregate  to  more  than  ten  per 
centum  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus,  unless  the  bank  is  secured  either  by 
attached  documents  or  by  some  other  actual  security 
growing  out  of  the  same  transaction  as  the  accept-  Exception 
ance. 

(Federal  Reserve  Act,  Section  13.) 


22 


Commercial     Banking     Practice 


Secured  bills 


Trust 
receipts 


Regulations  of  FedersJ  Reserve  Board 

The  fifth  paragraph  of  section  13  of  the  Federal 
Reserve  Act  as  amended  .  .  .  limits  the  amount 
which  any  bank  shall  accept  for  any  one  person, 
company,  firm,  or  corporation,  whether  in  a  foreign 
or  domestic  transaction,  to  an  amount  not  exceed- 
ing at  any  time,  in  the  aggregate,  more  than  ten 
per  centum  of  its  paid-up  and  unimpaired  capital 
stock  and  surplus.  This  limit,  however,  does  not 
apply  in  any  case  where  the  accepting  bank  remains 
secured  either  by  attached  documents  or  by  some 
other  actual  security  growing  out  of  the  same  trans- 
action as  the  acceptance.  A  trust  receipt  which 
permits  the  customer  to  have  access  to  or  control 
over  the  goods  vrill  not  be  considered  by  Federal 
reserve  banks  to  be  "actual  security"  within  the 
meaning  of  section  13.  A  bill  of  lading  draft,  how- 
ever, is  "actual  security"  even  after  the  documents 
have  been  released,  provided  that  the  draft  is  ac- 
cepted by  the  drawee  upon  or  before  the  surrender 
of  the  documents. 

(Regulation  C,  Series  of  1920,  A,  I.) 


Acceptances 
of  foreign 
correspondent 
under 

guarantee  of 
national  bank 


Opinions  and  Rulings 

Drafts  accepted  by  foreign  correspondents  at 
the  request  and  under  the  guarantee  of  a  national 
bank  in  the  United  States  should  be  reported  as  a 
direct  liability  of  such  national  bank,  and  treated 
as  subject  to  the  hmitations  imposed  by  the  Federal 
Reserve  Act  on  the  acceptance  power  of  national 
banks. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  April, 
1918,  page  311.  See  also  "Letters  of  Credit  and  Acceptances 
Issued  for  Correspondents,"  pages  69-63,  below.) 


BankAcceptancks  8t 

The  acceptance  by  a  bank  of  unsecured  drafts  Guarantee 
(under  the  guarantee  oi  one  oi  its  customers)  to  constitute 
an  amount  exceeding  ten  per  cent,  of  the  capital  Security 
and  surplus  of  the  bank  would  constitute  a  viola- 
tion of  the  limitation  contained  in  section  13  of  the 
Federal  Reserve  Act,  whether  or  not  the  customer 
of  the  bank  guaranteeing  the  acceptance  is  the 
drawer  of  the  draft,  or  some  other  person. 

(Ruling,   Federal   Reserve   Bulletin,   February,   1919,   page 
143.) 

Exemption  from  Ten  Per  Cent.  Limit. 

The  ten  per  cent,  limit  upon  the  amount  of  ac-  Secured 
ceptances  which  any  member  bank  might  make  for 
any  one  person,  company,  firm,  or  corporation  does 
not  apply  if  "the  bank  is  secured  either  by  attached 
documents  or  by  some  other  actual  security  grow- 
ing out  of  the  same  transaction  as  the  acceptance." 

If  documents  which  were  attached  at  the  time  Accepting 
of  the  acceptance  are  surrendered  and  no  other  *'^™"*' 

JT  ^         ^  remain 

security  growing  out  of  the  same  transaction  is  sub-  secured 
stituted,  the  ten  per  cent,  limit  will  apply.     The 
accepting  bank  must  remain  secured  in  the  manner 
prescribed  during  the  life  of  the  acceptance  in  order 
to  be  exempt  from  the  ten  per  cent,  limit. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1917,  page  286.) 

Under  the  provisions  of  section  13  a  member  character 
bank  may  accept  for  any  one  customer  in  excess  of  °  ""^'"''y 
ten  per  cent,  of  its  capital  and  surplus,  provided 
it  is  secured  by  attached  documents  or  by  some 
other  actual  security  growing  out  of  the  same  trans- 
action as  to  all  acceptances  in  excess  of  that  ten 
per  cent,  limitation. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  April,  1910. 
page  364.) 


24 


Commercial     Banking     Practice 


Custody 
of  security 


By  subsidiary 


By  guarantor 


A  syndicate  of  American  banks  has  accepted 
drafts  drawn  by  the  A  Bank  under  a  credit  to 
finance  the  importation  of  coffee.  The  A  Bank  is 
a  subsidiary  of  the  B  Bank,  which  executed  the 
acceptance  agreement  and  guaranteed  the  entire 
credit.  As  and  when  shipments  are  actually  made 
the  shipping  documents  are  forwarded  to  the  B 
Bank,  and  such  documents  and  any  documents  cov- 
ering the  coffee  after  arrival  are  held  by  that  bank 
as  the  agent  for  the  accepting  banks. 

While  it  is  not  necessary  that  the  attached  docu- 
ments or  other  security  be  in  the  physical  posses- 
sion of  the  accepting  bank,  since  possession  by  an 
agent  is  in  law  possession  by  the  principal,  the 
Board  is  of  the  opinion,  and  has  heretofore  ruled, 
that  the  accepting  bank  is  not  secured  in  compliance 
with  this  provision  when  docimients  are  held  by  the 
drawer  of  the  drafts  for  account  of  the  acceptor. 
So,  also,  the  Board  is  of  the  opinion  that  the  pro- 
vision is  not  complied  with  if  documents  are  held 
by  the  acceptor's  customer ;  that  is,  by  a  party  upon 
whose  credit  the  acceptor  relied  in  accepting  the 
drafts. 

The  fact  that  the  drawer  of  the  drafts  is  a  sub- 
sidiary of  the  B  Bank  does  not  of  itself  prevent 
the  latter  bank  from  being  a  proper  party  to  hold 
security  for  the  accepting  banks,  but  the  fact  that 
the  B  Bank  arranged  and  guaranteed  the  credit 
indicates  that  that  bank  is  the  customer  or  one  of 
the  customers  whose  credit  the  accepting  banks 
relied  upon  in  making  the  acceptances. 

The  Board  is  of  opinion,  therefore,  that  upon 
the  facts  stated  the  accepting  banks  are  not  secured 
within  the  meaning  of  the  provision  of  section  13 
when  the  documents  are  held  by  the  B  Bank  for 


BankAcceptances  26 

account  of  the  accepting  banks,  and,  consequently, 
that  no  member  bank  should  have  outstanding  ac- 
ceptances drawn  under  this  credit  in  excess  of  ten 
per  cent,  of  its  capital  and  surplus,  unless  some 
arrangement  is  made  whereby  the  docmnents  are 
to  be  held  by  some  other  party. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1921,  page  418.) 

The  only  doubtful  question  is  as  to  what  consti-  What  constitute. 

♦'  ^  .  •  I        i?  actual  security 

tutes  "some  other  actual  security  grooving  out  oi  growing  out  of 
the  same  transaction  as  the  acceptance."    The  ten  •^^^'^'"tion 
per  cent,  limit  does  not  apply  where  the  acceptor 
holds : 

1.  Shipping  documents ; 

2.  Warehouse  receipts ; 

3.  Trust  receipts  which  do  not  enable  the  bor- 

rower to  obtain  the  goods  for  his  own  use. 

The  ten  per  cent,  limit  does  apply  where  the 

bank  holds  merely  the  ordinary  trust  receipt  which 

gives  it  only  a  lien  on  the  goods  in  the  hands  of 

the  purchaser  or  on  their  proceeds. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1917,  page  286.) 

If  an  acceptance  is  secured  by  shipping  docu-  J^/^J^^'p" 
ments  which  are  surrendered  by  the  acceptor  for  security 
a  trust  receipt  which  permits  the  purchaser  of  the 
goods  to  retain  control  of  the  goods,  the  accepting 
bank  cannot  be  said  to  be  secured  "by  some  other 
actual  security"  as  provided  in  section  13  of  the 
Federal  Reserve  Act.  A  trust  receipt,  however, 
which  does  not  permit  the  purchaser  to  procure 
control  of  the  goods,  may  properly  be  said  to  be 
actual  security  within  the  meaning  of  the  Act. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  November, 
1917,  page  881.) 

Where  the  total  amount  accepted  for  any  one 


26 


Commercial     Banking     Practice 


Substitution 
of  security 


Trade  acceptance 
as  actual 
security 


customer  exceeds  ten  per  cent,  of  the  capital  and 
surplus  of  the  accepting  bank  the  security  cannot 
be  released  unless  some  other  actual  security  grow- 
ing out  of  the  same  transaction  is  substituted  there- 
for. A  trust  receipt  which  permits  the  customer 
for  whom  the  draft  is  accepted  to  obtain  control  of 
the  goods  is  not  actual  security  for  the  purposes 
of  this  provision  of  the  law. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1919,  page  253.) 

A  corporation  ships  goods  consigned  to  its  own 
agent;  it  draws  a  time  draft  on  its  own  bank  with 
the  bills  of  lading  attached;  the  bank  accepts,  the 
acceptance  being  in  excess  of  ten  per  cent,  of  its 
capital  and  surplus.  The  question  is  whether  the 
bills  of  lading  may  be  released  by  the  bank  to  the 
agent  who  is  the  consignee,  provided  that  the  agent 
substitutes  therefor  other  drafts  secured  by  bills  of 
lading  covering  the  same  goods  which  were  being 
shipped  by  the  agent  to  various  dealers.  The  Board 
is  of  the  opinion  that  the  new  drafts,  secured  by 
bills  of  lading  covering  the  same  goods,  do  consti- 
tute some  other  actual  security.  This  security  is 
not  only  an  actual  security  within  the  meaning  of 
the  Act,  but  it  grows  out  of  the  same  transaction 
as  the  original  acceptance,  and  therefore,  the  sub- 
stitution may  properly  be  made. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1919,  page  468.) 

An  exporter  draws  a  documentary  draft  on  a 
foreign  purchaser  and  uses  the  export  draft  as  secur- 
ity for  a  ninety-day  draft  against  his  bank  in  an 
amount  in  excess  of  ten  per  cent,  of  the  bank's 
capital  and  surplus.  The  bank  accepts  the  ninety- 
day  draft  and  forwards  the  export  draft  for  ac- 
ceptance.    The  foreign  buyer  accepts  the  draft, 


BankAcceptances  27 

which  thereupon  becomes  a  trade  acceptance,  and 
receives  the  shipping  documents. 

The  trade  acceptance  drawn  on  and  accepted  by 
the  foreign  buyer  may  be  considered  "actual  secur- 
ity" within  the  meaning  of  section  13  of  the  Fed- 
eral Reserve  Act. 

(Ruling,   Federal    Reserve   Bulletin,   October,    1920,    page 

1065.) 

Relation   of   United  States   Revised   Statutes,   Section   5200,    to 
the  Ten  Per  Cent.  Limit. 

The  hmitations  imposed  by  section  5200,  Re-  when  not 
vised  Statutes,  on  the  amount  of  money  which  may  »pp''"'''« 
be  borrowed  by  any  individual  from  a  member  bank 
do  not  apply  to  acceptances  of  such  bank  unless 
purchased  by  the  accepting  bank. 

A  member  bank  may  legally  purchase  its  own  When  section 
acceptances,  but  such  a  transaction  is  equivalent  to  ^zoo^pp"'" 
a  loan  or  advance  to  the  customer  for  whom  the  ac- 
ceptance was  made  and  the  liability  of  such  cus- 
tomer becomes  subject  to  the  limitations  of  section 
5200,  Revised  Statutes. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1916,  page  680.) 

Where  a  national  bank  has  already  loaned  ten  AcceptancM 
per  cent,  of  its  capital  and  surplus  to  a  certain  to  loans 
company,  it  may,  while  the  loan  is  still  outstanding, 
obligate  itself  as  acceptor  on  a  draft  drawn  by  the 
same  company. 

If,  however,  the  member  bank  discounts  its  own  Exception 
acceptance  under  the  foregoing  circumstances,  it 
must  treat  the  transaction  as  a  loan  and  not  as  an 
acceptance,  and  could  not  in  that  case  lend  to,  and 
accept  for,  the  same  firm  in  an  aggregate  amount  in 
excess  of  the  ten  per  cent,  prescribed  by  section 

5200. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1918,  page 
197.) 


28 


Commercial     Banking     Practice 


When  drawer 
fails  to  provide 
funds  to  meet 
acceptance 


Fifty  per 
cent.  limit 


Acceptances 
up  to  100  per 
cent. 


Application 
for  power  to 
accept  up  to 
100  per  cent. 


The  ten  per  cent,  limitation  imposed  by  section 
5200  of  the  Revised  Statutes  is  not  intended  to  ap- 
ply to  the  mere  acceptance  of  a  bill  of  exchange, 
but  the  provisions  of  section  5200  would  apply  to 
the  indebtedness  arising  between  the  drawer  of  the 
bill  and  the  accepting  bank  in  case  the  drawer  fails 
to  furnish  funds  with  which  to  meet  the  acceptance 
at  maturity. 

(Ruling,  Federal  Reserve  Bulletin^  September,  1915,  page 
269,  February,  1916,  page  64..) 

AGGREGATE  AMOUNT  BANK  MAY  ACCEPT 
Statutory  Provisions 

No  bank  shall  accept  such  bills  to  an  amount 
equal  at  any  time  in  the  aggregate  to  more  than 
one-half  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus :  Provided,  however.  That  the  Federal 
Reserve  Board,  under  such  general  regulations  as 
it  may  prescribe,  which  shall  apply  to  all  banks 
alike  regardless  of  the  amount  of  capital  stock  and 
surplus,  may  authorize  any  member  bank  to  accept 
such  bills  to  an  amount  not  exceeding  at  any  time 
in  the  aggregate  one  hundred  per  centum  of  its 
paid-up  and  unimpaired  capital  stock  and  surplus. 

(Federal  Reserve  Act,  Section   13.) 

Regulations  of  Federed  Reserve  Board 

1.  Under  the  provisions  of  the  law  referred  to 
above  the  Federal  Reserve  Board  has  determined 
that  any  member  bank,  having  an  unimpaired  sur- 
plus equal  to  at  least  twenty  per  centum  of  its  paid- 
up  capital,  which  desires  to  accept  drafts  or  bills  of 
exchange  drawn  .  .  .  [against  domestic  or  foreign 
shipments  of  goods  or  secured  by  warehouse  re- 
ceipts], up  to  an  amount  not  exceeding  at  any 
time,  in  the  aggregate,  one  hundred  per  centum  of 


BankAcceptances  29 

its  paid-up  and  unimpaired  capital  stock  and  sur- 
plus, may  file  an  application  for  that  purpose  with 
the  Federal  Reserve  Board.  Such  application  must 
be  forwarded  through  the  Federal  reserve  bank  of 
the  district  in  which  the  applying  bank  is  located. 

2.  The  Federal  reserve  bank  shall  report  to  Report  on 
the  Federal  Reserve  Board  upon  the  standing  of  application 
the  applying  bank,  stating  w^hether  the  business  and 
banking  conditions  prevailing  in  its  district  war- 
rant the  granting  of  such  applications. 

3.  The  approval  of  any  such  application  may 
be  rescinded  upon  ninety  days'  notice  to  the  bank 
affected. 

(Regulation  C,  Series  of  1920,  A,  II.) 

Opinions  and  Rulings 

Authority  from  the  Federal  Reserve  Board  is  Permission  to 
not  necessary  for  a  member  bank  to  undertake  ac-  s^p^^ "ent! 
ceptance  business,  unless  the  bank  wishes  to  exceed  not  required 
fifty  per  cent,  of  its  capital  and  surplus. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1915,  page  126.) 

^Vhere  a  bank  has  been  granted  permission  to  increase  of 
accept  in  an  amount  not  exceeding  in  the  aggregate  *"^'"' 
one  hundred  per  cent,  of  its  paid-up  capital  and  ,'♦, 

surplus,  it  is  not  necessary  for  such  bank  to  obtain        ,*'  \ 
additional  authoritj'-  from  the  Board  each  time  it        ;      'j^ 
increases  its  surplus.  y  • 

(Ruling,   Federal  Reserve   Bulletin,   February,    1919,  page  ^ 

143.) 

Drafts  accepted  by  foreign  correspondents   at  Acceptances  of 
the  request  and  under  the  guarantee  of  a  national  ^der^^"aran- 
bank  in  the  United  States  should  be  reported  as  Ifg^tion^i  bank 
a  direct  liabihty  of  such  national  bank,  and  should 
be  treated  as  subject  to  the  limitations  imposed  by 


to 


Commercial     Banking     Practicb 


Purchase  of 
bank's  own 
acceptance 


Limitations 
of  section 
5202 


Letters  of 
credit 
not  limited 
by  section  5202 


Letters  of 
credit  not 
limited  by 
section  13 


the  Federal  Reserve  Act  on  the  acceptance  power 
of  national  banks. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  April, 
1918,  page  311.  See  also  "Letters  of  Credit  and  Acceptances 
Issued  for  Correspondents,"  pages  59-63,  below.) 

When  a  member  bank  purchases  its  own  accept- 
ance before  maturity  such  acceptance  need  not  be 
included  in  the  aggregate  of  acceptances  author- 
ized by  section  13. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  August, 
1916,  page  397.  See  also  "Purchase  by  National  Bank  of 
its  own  Acceptances,"  pages  67-68,  below.) 

The  limitations  imposed  by  section  5202,  Revised 
Statutes,  on  the  liabihties  incurred  by  any  national 
bank  do  not  apply  to  acceptances  of  such  banks. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1916,  page  680.) 

Inasmuch  as  a  commercial  letter  of  credit  is 
simply  an  agreement  to  make  acceptances,  and  the 
authority  of  national  banks  to  issue  such  letters  of 
credit  is  incidental  to  the  authority  expressly 
granted  by  section  13  of  the  Act  to  make  accept- 
ances in  certain  transactions,  and  such  letters  may 
properly  be  issued  only  in  connection  with  the  kinds 
of  transactions  specified  in  that  section,  it  seems 
clear  that  the  liability  of  a  member  bank  upon  a 
commercial  letter  of  credit  is  a  liability  incurred  un- 
der the  provisions  of  the  Federal  Reserve  Act,  and 
is  not  subject  to  the  limitations  of  section  5202  of 
the  Revised  Statutes. 

The  Board  is  further  of  the  opinion  that  the 
liability  incurred  upon  a  commercial  letter  of  credit 
— that  is,  upon  the  agreement  or  letter  itself,  as  dis- 
tinguished from  the  acceptances  made  thereunder — ■ 
should  not  be  classified  as  an  acceptance  liability 
within  the  limitation  imposed  upon  the  aggregate 


BankAcceptances  81 

Amount  of  acceptances  outstanding  at  any  one  time 
Linder  the  provisions  of  section  13  of  the  Federal 
Reserve  Act.  It  would  seem  that  a  member  bank 
nay  issue  a  letter  of  credit,  the  aggregate  amount 
3f  which  may  be  in  excess  of  the  fifty  per  cent,  or 
3ne  hundred  per  cent,  of  the  bank's  capital  and  sur- 
plus, provided  that  the  aggregate  amount  of  the  ac- 
[^eptances  made  under  the  letter  of  credit  and  out- 
standing at  any  one  time  does  not  exceed,  in  addi- 
tion to  the  bank's  other  outstanding  acceptances, 
the  aggregate  limitation  upon  acceptances  pre- 
scribed in  section  13. 

Nevertheless,  a  member  bank  should  not  obligate  Reasonable 
itself  to  accept  drafts  under  a  letter  of  credit  to  *™ 
such  an  amount  that  it  is  reasonable  to  anticipate 
that  the  aggregate  amount  of  acceptances  issued 
under  that  letter  and  outstanding  at  any  time,  to- 
gether with  other  acceptances  which  may  be  out- 
standing, will  exceed  at  any  one  time  the  limitation 
to  which  the  member  bank  is  subject. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  July,  1921, 
page  816.) 


Acceptances 
in  domestic 
trade 


Eligibility 
not  dependent 
on  security 
alone 


Bank  Acceptances  Based  on  Domestic 
Shipments  of  Goods 

CHARACTER 

Statutory  Provisions 

Any  member  bank  may  accept  drafts  or  bills  of 
exchange  drawn  upon  it  .  .  .  which  grow  out 
of  transactions  involving  the  domestic  shipment  of 
goods  provided  shipping  documents  conveying  or 
securing  title  are  attached  at  the  time  of  acceptance. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

A  draft  drawn  by  the  purchaser  of  the  goods 
against  a  national  bank  is  not  eligible  for  accept- 
ance by  that  bank  merely  because  it  is  secured  by  a 
bill  of  lading  covering  the  goods  bought. 

The  law  contemplates  some  actual  connection  be- 
tween the  acceptance  of  the  draft  and  the  transac- 
tion involving  the  sale  and  shipment  of  the  goods 
— that  is,  it  was  evidently  intended  that  the  draft 
should  be  drawn  to  finance  that  transaction.  If  a 
seller  ships  goods  and  mails  the  bill  of  lading  to  the 
purchaser  and  on  arrival  of  the  bill  of  lading  the 
purchaser  draws  on  his  own  bank,  attaching  the 
bill  of  lading  as  security,  and  offers  it  for  accept- 
ance, the  transaction  is  merely  a  straight  loan  to 
the  drawer  secured  bj^  a  bill  of  lading.  As  such  it 
would  not  come  within  the  spirit  of  the  provisions 
of  section  13. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  May,  1917,. 
page  380.) 

\ 


34 


Commercial     Banking     Practice 


Application 
of  proceeds 


Automobiles 
and  tires 


Shipment 
of  oil 


A  draft  drawn  by  the  purchaser  of  goods  is  not 
eligible  for  acceptance  merely  because  it  is  secured 
at  the  time  of  acceptance  by  a  bill  of  lading  cover- 
ing the  goods  bought.  It  must  be  established  that 
the  proceeds  of  the  draft  are  applied  to  the  pay- 
ment of  those  goods. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  January, 
1920,  page  66.) 

The  ruling  that  automobiles  and  tires  cannot 
properly  be  considered  readily  marketable  staples 
should  not  be  construed  to  deny  the  right  of  a 
member  bank  to  accept  a  draft  to  which  is  at- 
tached at  the  time  of  acceptance  a  bill  of  lading 
covering  an  automobile  or  automobile  tires  in  the 
process  of  shipment,  provided  that  the  draft  other- 
wise complies  with  the  terms  of  the  law  and  the 
regulations  of  the  Federal  Reserve  Board. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1920,  page 
65.) 

An  oil-producing  company  had  contracted  to  sell 
oil  for  cash  to  an  oil- distributing  company  and  the 
latter  had,  in  turn,  contracted  to  sell  the  oil  on 
credit  to  a  railroad  company.  The  distributing 
company  wished  to  draw  drafts  upon  the  national 
bank,  secured  at  the  time  of  acceptance  by  bills 
of  lading  covering  the  oil  in  transit  from  the  pro- 
ducing company  to  the  railroad  company  and  with 
the  proceeds  of  the  accepted  drafts  to  pay  the  pro- 
ducing company  for  the  oil. 

The  drafts  drawn  by  the  distributing  company 
would  be  eligible  for  acceptance  by  the  national 
bank,  providing  the  bank  is  secured  at  the  time  of 
acceptance  by  shipping  documents  which  convey  or 
secure  title  to  the  oil,  and  provided,  further,  that 


BankAcceptances  35 

the  drafts  comply  in  all  other  respects  with  the 
terms  of  the  law  and  the  regulations. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1921,  page  308.) 

A  member  bank  may  properly  accept  a  draft  ^JJJ"* 
dra^^Ti  against  the  shipment  of  goods  from  a  cor-  sale 
poration  to  its  agent  or  branch  even  though  no  sale 
of  the  goods  is  involved  in  the  transaction. 

In  any  case  where  a  draft  is  drawn  against  a  Maturity 
shipment  of  goods  in  a  transaction  which  does  not 
involve  the  sale  of  those  goods,  the  maturity  of  the 
draft  should  approximate  the  duration  of  their 
transit.  In  such  a  case  the  law  contemplates  that 
the  acceptance  of  the  draft  should  be  for  the  pur- 
pose of  financing  the  shipment,  and  that  it  should 
not  be  the  means  of  furnishing  a  credit  for  any 
other  purpose. 

(Ruling,  Federal  Reserve  Bulletin,  September,   1917,  page 
690.) 

The  Board  has  ruled  that  a  national  bank  may  Sjiipment 

.     .  n  1  1  •     '      ®'  cattle 

accept  a  draft  drawn  upon  it  it  secured  at  the  time 
of  accej^tance  by  a  bill  of  lading  covering  a  ship- 
ment of  cattle  to  a  cattle  raiser  who  has  purchased 
them  with  the  intention  of  fattening  and  reselling 
them.  The  period  covered  by  the  acceptance,  how- 
ever, should  not  be  in  excess  of  the  period  of  credit 
which  is  usual  and  reasonablj^  necessary  to  finance 
transactions  of  this  character. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1921,  page  815.) 
Shipping  Documents. 

Under  the  provisions  of  section  13,  which  author-  Character 
izes  any  member  bank  to  accept  drafts  based  upon 
domestic   shipments   of  goods,   provided   shipping 
documents  conveying  or  securing  title  are  attached, 
such  documents  must  be  m.ade  out  or  indorsed  so 


Commercial     Banking     Practice 


Documents 
not  re- 
quired  to 
be  phyticallj 
atUched 


Custody  of 
documents 


Release  of 
documents 


as  to  convey  or  secure  title  to  the  accepting  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin.  March, 
1918,  page  198.) 

A  provision  of  section  13  which  authorizes  any 
member  bank  to  accept  drafts  based  upon  the  do- 
mestic shipment  of  goods,  provided  shipping  docu- 
ments are  "attached,"  should  not  be  construed  so 
as  to  require  that  the  documents  be  physically  fas- 
tened to  the  draft.  It  is  sufficient  if  the  accepting 
bank  has  possession  of  the  documents  at  the  time 
of  acceptance. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  October, 
1917,  page  765.) 

It  is  entirely  consistent  \^ath  the  purposes  of  the 
Act  and  a  sufficient  compliance  with  its  terms  if 
shipping  documents  are  in  the  possession  of  the 
bank  and  the  bank  has  a  Hen  on  the  property  rep- 
resented by  such  docimients  at  the  time  that  such 
bill  is  accepted.  If  placed  in  the  possession  of  the 
bank's  agent  and  under  the  control  of  the  bank 
such  documents  could  clearly  be  considered  as  in 
the  possession  of  the  bank.  Care  should,  however, 
be  taken  that  the  documents  be  held  for  account  of 
the  accepting  bank  by  a  third  party  who  is  in  no 
way  interested  in  the  acceptance  transaction.  A 
trust  receipt  of  the  party  for  whom  the  acceptance 
is  made  would  not  be  looked  upon  vnth  favor  by 
the  Board. 

(Ruling,  Federal  Reserve  Bulletin,  October,  1918,  page 
972.) 

Retention  or  Release  of  Documents  against  Acceptance. 

Question  is  whether  it  is  necessar\^  where  a  do- 
mestic acceptance  is  based  upon  a  bill  of  lading,  that 
the  bank  retain  the  bill  of  lading  or  other  collateral 
during  the  life  of  the  acceptance,  or  may  the  bank 


BankAcckptances  37 

release  the  bill  of  lading  after  acceptance.  Also, 
whether  the  same  rule  will  apply  in  case  the  accept- 
ance is  secured  by  a  warehouse  receipt. 

Inasmuch  as  the  statute  merely  requires  the  ac- 
cepting bank  to  be  secured  in  domestic  transactions 
by  shipping  documents  or  warehouse  receipts  at  the 
time  of  acceptance,  the  bank  would  no  doubt  have 
the  right,  if  it  became  necessary  to  do  so,  to  release 
either  the  shipping  document  or  the  warehouse  re- 
ceipt, provided  the  draft  or  drafts  accepted  for  one 
person  did  not  exceed  ten  per  cent,  of  the  capital 
and  surplus  of  the  accepting  bank. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1918,  page  634.) 

A  member  bank  can  not  accept  in  domestic  trans-  Customer's 
actions  without  being  secured  at  the  time  of  accept- 
ance, but  may  release  the  security  after  acceptance 
upon  the  execution  of  a  trust  receipt  or  an  agree- 
ment by  the  customer  that  so  much  of  the  proceeds 
of  the  sale  of  the  goods  covered  by  the  security  as 
may  be  necessary  to  pay  the  draft  will  be  deposited 
with,  the  accepting  bank  when  available  and  will 
not  be  used  for  other  purposes. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1919,  page 
143.) 

The  accepting  bank  msiy,  if  it  chooses,  release  the  Release 
security  in  any  case  in  which  the  total  amount  ac-  lo  per  cent.  limit 
cepted  for  any  one  customer  does  not  exceed  ten 
per  cent,  of  its  capital  stock  and  surplus. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  March, 
1919,  page  255.) 

See  also  Regulation  A,  Series  of  1920,  B,  pages 
135-137,  below. 


38 


Commercial     Banking     Practice 


Maturity  not 
to  exceed  six 
months 


Credit  agree- 
ment for  more 
than  six 
months 


Determination 
of  maturity 


Renewal 
acceptances 


MATURITY 
Statutory  Provisions 

Any  member  bank  may  accept  drafts  or  bills  of 
exchange  drawn  upon  it  having  not  more  than  six 
months'  sight  to  run,  exclusive  of  days  of  grace. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

While  a  letter  of  credit  or  credit  agreement  may 
be  lawfully  made  by  a  national  bank  which  will 
extend  by  its  terms  for  a  period  exceeding  six 
months,  the  agreement  must  not  be  of  such  a  char- 
acter as  will  impose  upon  the  holders  of  the  drafts 
accepted  thereunder  any  obligation  to  renew  such 
drafts  so  that  the  period  of  acceptance  shall  exceed 
six  months  in  duration  as  to  any  specified  draft. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1915,  page 
269.) 

Where  a  six  months'  credit  is  required  it  is  im- 
proper to  grant  that  credit  by  means  of  two  three 
months'  acceptances  for  the  purpose  of  making  the 
acceptances  at  all  times  eligible  for  rediscount  by 
Federal  reserve  banks.  On  the  other  hand,  the 
period  covered  by  an  acceptance  should  not  be  in 
excess  of  that  which  is  usual  and  reasonably  neces- 
sary to  finance  the  underlying  transaction. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1921,  page  308.) 

No  national  bank  may  properly  accept  the  re- 
newal of  a  draft  drawn  by  the  purchaser  of  goods 
and  secured  at  the  time  of  original  acceptance  by  a 
bill  of  lading  or  warehouse  receipt  unless  the  re- 
newal acceptance  complies  with  the  terms  of  the 
law  and  the  rulings  and  regulations  of  the  Board 
applicable  to  the  original  acceptance. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  January, 
1920,  page  66.) 


BankAcceptances  39 

In  any  case  where  a  draft  is  drawn  against  a  Shipment 
shipment  of  goods  in  a  transaction  which  does  not  J'aie"" 
involve  the  sale  of  those  goods,  the  maturity  of  the 
draft  should  approximate  the  duration  of  their 
transit.  In  such  a  case  the  law  contemplates  that 
the  acceptance  of  the  draft  should  be  for  the  pur- 
pose of  financing  the  shipment,  and  that  it  should 
not  be  the  means  of  furnishing  a  credit  for  any  other 
purpose. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1917,  page 
590.) 

The  period  during  which  the  acceptances  are  to  Drafts  to 
run  should  have  some  relation  to  the  period  of  time  shipment 
actually  required  for  the  shipment.  The  acceptance  ""'^ 
3f  drafts  secured  by  bills  of  lading  for  the  primary 
purpose  of  providing  the  borrower  with  working 
capital  during  the  period  required  to  manufacture 
md  resell  the  goods  covered  by  the  bills  of  lading 
!s  an  abuse  of  the  domestic  acceptance  privilege. 

(Ruling,   Federal  Reserve  Bulletin,  December,   1920,  page 
1301.) 


AMOUNT  BANK  MAY  ACCEPT  FOR  ONE  INTEREST 

See  "Bank  Acceptances  Based  on  Imports  and 
Exports,"  pages  21-28,  above. 

AGGREGATE   AMOUNT  BANK  MAY   ACCEPT 

Statutory  Provisions 

No  bank  shall  accept  such  bills  to  an  amount  Acceptances 
squal  at  any  time  in  the  aggregate  to  more  than  percent, 
me-half  of  its  paid-up  and  unimpaired  capital  stock 
md  surplus:  Provided,  however.  That  the  Federal 
Reserve  Board,  under  such  general  regulations  as 
t  may  prescribe,  which  shall  apply  to  all  banks 


40 


Domestic 
acceptances  not 
to  exceed 
50  percent. 


Application 
of  limit 


Authority  of 
Foderal  Reserre 
Bowd 


Commercial     Banking     Practice 

alike  regardless  of  the  amount  of  capital  stock  and 
surplus,  may  authorize  any  member  bank  to  accept 
such  bills  to  an  amount  not  exceeding  at  any  time 
in  the  aggregate  one  hundred  per  centum  of  its 
paid-up  and  unimpaired  capital  stock  and  surplus  :* 
Provided,  further.  That  the  aggregate  of  accept- 
ances growing  out  of  domestic  transactions  shall  in 
no  event  exceed  fifty  per  centimi  of  such  capital 
stock  and  surplus. 

(Federal  Reserve  Act,  Section  13,) 

Opinions  and  Rulings 

The  fifty  per  cent,  limit  relates  to  drafts  or  bills 
dra\^Ti  against  a  bank  in  domestic  transactions  and 
accepted  by  that  bank.  It  does  not  relate  to  drafts 
drawn  by  an  individual  against  some  other  drawee 
which  are  accepted  by  the  drawee  and  discounted 
by  the  bank. 

The  Federal  Reserve  Board  is  without  authority 
to  permit  a  member  bank  to  accept  drafts  drawn 
against  it  in  domestic  transactions  in  excess  of  fifty 
per  cent,  of  the  capital  and  surplus  of  the  accepting 
bank.  It  may  authorize  a  member  bank  to  accept 
drafts  up  to  one  hundred  per  cent.,  which  amount 
may  include  both  those  which  grow  out  of  transac- 
tions involving  the  exportation  or  importation  of 
goods  and  those  which  grow  out  of  domestic  trans- 
actions; but  the  statute  limits  specifically  the 
amount  that  may  be  accepted  in  domestic  transac- 
tions to  fifty  per  cent,  of  the  capital  and  surplus  of 
the  accepting  bank. 

(Ruling,  Federal  Reserve  Bulletin,  November,  1918,  page 
1119.) 

*For  regulations  governing  acceptance  of  domestic  and  for- 
eign drafts  up  to  an  aggregate  of  one  hundred  per  cent,  of 
bank's  capital  and  surplus,  see  "Bank  Acceptances  Based  on  . 
Imports  and  Exports,"  pages  28-31,  above.  1 


BankAcckptances  41 


s  own 

acceptances 


When  a  member  bank  purchases  its  own  accept-  Purch«ie»f 

ance  before  maturity  such  acceptance  need  not  be  l^'^^' 

included  in  the  aggregate  of  acceptances  author 

ized  by  section  13. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  August, 
1916,  page  397.  See  also  "Purchase  by  National  Bank  of 
its  own  Acceptances,"  pages  67-68,  below.) 

The  limitations  imposed  by  section  5202,  Revised  Section  5202 
Statutes,  on  the  liabilities  incurred  by  any  national  to  acceptances 
bank  do  not  apply  to  acceptances  of  such  banks. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1916,  page  680.) 

Inasmuch  as   a  commercial  letter  of  credit  is  Letters  of 
simply  an  agreement  to  make  acceptances,  and  the  ii,^ted  by 
authority  of  national  banks  to  issue  such  letters  of  "'='>°"  ^202 
credit    is    incidental    to    the    authority    expressly 
granted  by  section  13  of  the  Act  to  make  accept- 
ances in  certain  transactions,  and  such  letters  may 
properly  be  issued  only  in  connection  with  the  kinds 
of  transactions  specified  in  that  section,  it  seems 
clear  that  the  hability  of  a  member  bank  upon  a 
commercial  letter  of  credit  is  a  liability  incurred 
under  the  provisions  of  the  Federal  Reserve  Act, 
and  is  not  subject  to  the  limitations  of  section  5202 
of  the  Revised  Statutes. 

The  Board  is  further  of  the  opinion  that  the  lia-  L^JJ?"^^{ 
bility  incurred  upon  a  commercial  letter  of  credit —  Uniiied  by 
that  is,  upon  the  agreement  or  letter  itself,  as  dis-  ""*"""  ^^ 
tinguished  from  the  acceptances  made  thereunder — 
should  not  be  classified  as  an  acceptance  liability 
within  the  limitation  imposed  upon  the  aggregate 
amount  of  acceptances  outstanding  at  any  one  time 
under  the  provisions  of  section  13  of  the  Federal 
Reserve  Act.    It  would  seem  that  a  member  bank 
may  issue  a  letter  of  credit,  the  aggregate  amount 


42  Commercial     Banking     Practice 

of  which  may  be  in  excess  of  the  fifty  per  cent,  or 
one  hundred  per  cent,  of  the  bank's  capital  and  sur- 
plus, provided  that  the  aggregate  amount  of  the  ac- 
ceptances made  under  the  letter  of  credit  and  out- 
standing at  any  one  time  does  not  exceed,  in  addi- 
tion to  the  bank's  other  outstanding  acceptances, 
the  aggregate  limitation  upon  acceptances  pre- 
scribed in  section  13. 
Reasonable  Nevertheless,  a  member  bank  should  not  obhgate 

•»™'*  itself  to  accept  drafts  under  a  letter  of  credit  to 

such  an  amount  that  it  is  reasonable  to  anticipate 
that  the  aggregate  amount  of  acceptances  issued 
under  that  letter  and  outstanding  at  any  time,  to- 
gether with  other  acceptances  which  may  be  out- 
standing, v/ill  exceed  at  any  one  time  the  limitation 
to  which  the  member  bank  is  subject. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  July,  1921, 
page  816.) 


Bank  Acceptances  Secured  by 
Warehouse  Receipts 

CHARACTER 
Statutory  Provisions 

Any  member  bank  may  accept  drafts  or  bills  of 
exchange  dra^\Ti  upon  it  .  .  .  which  are  secured 
at  the  time  of  acceptance  by  a  warehouse  receipt 
or  other  such  document  conveying  or  securing  title 
covering  readily  marketable  staples. 

(Federal  Reserve  Act^  Section  13.) 

Regulations  of  Federal  Reserve  Board 

A  readily  marketable  staple  .  .  .  may  be  defined  Readily 
as  an  article  of  commerce,  agriculture,  or  industry  ^pj^^, 
of  such  uses  as  to  make  it  the  subject  of  constant 
dealings  in  ready  markets  Avith  such  frequent  quo- 
tations of  price  as  to  make  (a)  the  price  easily  and 
definitely  ascertainable  and  (b)  the  staple  itself 
easy  to  realize  upon  b}^  sale  at  any  time. 

(Regulation  C,  Series  of  1920,  A,  I,  note.) 
Opinions  and  Rulings 

Readily  Marketable  Staples. 

Although  the  law  does  not  expressly  restrict  PenshaUe 
eligible  staples  to  those  which  are  nonperishable,  *'*'*" 
nevertheless  banks  as  a  matter  of  prudence  and 
protection  to  themselves  should  not  consider  as 
eligible  any  staple  which  is  in  its  nature  so  perish- 
able as  not  to  be  reasonably  sure  of  maintaining  its 
value  as  secm-ity  at  least  for  the  life  of  the  draft 
which  is  drawn  against  it. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1919,  page  652.) 


BankAcceptances  45 

Potatoes  properly  graded  and  packed  and  stored  PoWoe* 
in  a  weather-proof  and  responsible  warehouse,  as 
evidenced  by  its  receipt,  would  undoubtedly  consti- 
tute a  readily  marketable  nonperishable  staple. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1917,  page  614.) 

The  term  "staples"  includes  manufactured  goods  Cotton  yam« 
as  well  as  raw  materials,  provided  the  goods  are  °"    "" 
nonperishable  and  have  a  wide  ready  market.   Cot- 
ton j^arns  and  flour  are  held  to  be  such  staples. 

(Ruling,   Federal    Reserve    Bulletin,   October,    1916,   page 
623.) 

A  warehouse  receipt  covering  whiskey  in  bond  Whiskey 
which  can  be  removed  only  for  very  specific  and 
limited   purposes   is   not   a   receipt   conveying   or 
securing    title    to    "readily    marketable    staples" 
within  the  meaning  of  that  section. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1920,  page  494.) 

The  Board  is  of  the  opinion  that  a  warehouse  Sacramental 
receipt  covering  wine  in  bond,  whether  intended  *"* 
for  sacramental  or  other  purposes,  can  not  be  con- 
sidered a  receipt  conveying  or  securing  title  to 
"readily  marketable  staples"  within  the  meaning 
of  section  13  of  the  Federal  Reserve  Act. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1921,  page  419.) 

An  automobile  is  not  a  readily  marketable  staple  AutomobUei 
within  the  meaning  of  the  definition.    Automobile 
tires  cannot  properly  be  considered  readily  market- 
able staples. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1920,  page  65.) 
Eligible  Security. 

No  draft  which  is  secured  by  a  warehouse  receipt  Term  of 
should  properly  be  considered  eligible  for  accept-  '*"*^* 
ance  under  the  terms  of  section  13  of  the  Federal 


46 


Commercial     Banking     Practice 


Foreign 

warehouse 

receipts 


Warehouse  receipts 
to  be  issued  by 
independent 
warehouses 


Relation  between 
borrower  and  ware- 
house corporation 


Reserve  Act  unless  the  goods  covered  by  the  ware- 
house receipt  are  being  held  in  storage  pending  a 
reasonably  immediate  sale,  shipment,  or  distribu- 
tion into  the  process  of  manufacture. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1919,  page 
858.) 

A  draft  drawn  abroad,  paj^able  in  the  United 
States  in  dollars  and  secured  by  a  warehouse  re- 
ceipt covering  readily  marketable  staples  stored  in 
a  warehouse  located  in  a  foreign  country,  is  ehgible 
for  acceptance  by  a  member  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  August, 
1919,  page  740.) 

Warehouse  receipts  offered  as  security  for  bills 
accepted  by  member  banks  must  be  issued  by  ware- 
houses which  are  independent  of  the  borrower. 

Where  a  corporation  is  formed  as  a  subterfuge 
for  the  purpose  of  evading  the  spirit  of  the  Board's 
ruling,  this  fact  should  be  taken  into  consideration 
by  a  member  bank  accepting  the  bill  and  by  the 
Federal  reserve  bank  to  which  it  is  offered  for  dis- 
count. 

If  the  borrower  exercises  such  control  over  the 
corporation  issuing  the  w^arehouse  receipt  as  to  give 
him  control  over  the  goods  in  storage,  the  purpose 
of  requiring  a  receipt  of  the  independent  ware- 
houseman would  be  defeated.  The  corporation  is- 
suing such  receipt  must  be  organized  in  good  faith 
as  an  independent  corporation  and  its  affairs  must 
be  administered  by  duly  authorized  officers  and 
agents  independent  of  the  borrower. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1918,  page  31.) 

The  requirements  of  the  Board  appear  to  have 
been  met  where  a  separate  corporation  has  been 


BankAcceptances  47 

created  and  the  warehouse  receipts  are  issued  by 
that  corporation  and  not  by  the  borrower.  How- 
ever, where  both  corporations  have  practically  the 
same  officers,  the  manager  of  the  warehouse  ap- 
pointed to  execute  the  receipts  should  not  be  an 
employee  of  the  borrowing  company,  as  the  Board 
requires  that  the  receipts  should  be  issued  bj'^  a 
company  independent  of  the  borrower,  and  this  re- 
quirement should  be  met  in  substance  as  Avell  as  in 
form. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1918,  page 
862.) 

A  borrowing  corporation  takes  receipts  for  goods 
and  materials  stored  in  a  warehouse  controlled  by  a 
separate  corporation  engaged  solely  in  the  ware- 
house business,  the  entire  stock  of  which  is  owned 
by  the  prospective  borrower. 

If  a  representative  of  the  accepting  bank  is  given  Control  of 
control  of  the  warehouse  under  a  proper  resolution  *"ep'j""7  ^^ 
of  the  directors  of  the  warehouse  corporation,  the  representatire 
fact  that  the  stock  of  the  corporation  is  owned  by 
the  borrower  should  not  prevent  the  acceptance  of 
drafts  secured  by  the  warehouse  receipts. 

It  should  be  agreed,  however,  that  if  by  any  fu- 
ture action  of  the  warehouse  corporation  an  attempt 
is  made  to  exercise  control  over  the  warehouse,  the 
representative  of  the  acceptor  should  have  the  right 
to  move  the  goods  and  to  place  them  in  storage  else- 
where at  the  expense  of  the  warehouse  corporation. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1918,  page 
862.) 

A  canned  goods  concern  proposes  to  place  part  Warehouse  receipu 
of  its  readily  marketable  goods  and  materials  in  """J '>y '"»«« 
storage  w^ith  a  lessee  of  part  of  its  premises.    The 
lessee  is  then  to  issue  warehouse  receipts  to  the 


48 


Commercial     Banking     Practice 


Receipt  of  cus- 
todian of  wool  as 
warehouse  receipt 


Acceptance  of 
drafts  against 
sugar  in  bond 


owner  of  the  goods,  which  receipts  are  to  be  used  as 
security  for  drafts  drawn  against  and  accepted  by 
a  member  bank. 

If  the  premises  in  question  are  actually  turned 
over  to  the  lessee  under  a  bona  fide  lease,  the  lessee    jj 
being  independent  of  the  borrower  and  having  en-    '1 
tire  custody  and  control  of  the  goods,  there  would 
seem  to  be  no  objection  to  a  member  bank's  ac- 
cepting drafts  against  the  security  of  warehouse  re- 
ceipts issued  by  such  lessee.    It  should,  however,  be 
expressly  understood  and  agreed  that  the  borrower 
shall  not  have  access  to  the  premises  except  with  the 
permission  of  the  lessee  and  that  he  shall  exercise  no    , 
control  of  any  sort  over  the  goods  against  which    f 
warehouse  receipts  are  issued.    The  warehouse  re- 
ceipts must,  of  course,  be  in  form  properly  to  con- 
vey and  secure  title  to  the  bank. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1918,  page  634.) 

It  being  understood  that  wool  is  stored  in  build- 
ings under  control  of  custodian  entirely  indepen- 
dent of  borrower,  custodian's  certificate  or  receipt, 
if  issued  in  proper  form  to  convey  or  secure  title, 
may  be  treated  as  a  warehouse  receipt  within  the 
meaning  of  section  13  of  the  Federal  Reserve  Act 
and  acceptance  of  member  bank  under  such  condi- 
tions would  be  eligible  for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1918,  page  636.) 

It  is  the  understanding  of  this  office  that  sugar 
referred  to  is  placed  in  bond  under  transit  entry 
and  warehouse  receipt  issued  by  collector  in  nego-  { 
tiable  form,  but  sugar  can  not  be  withdrawn  for 
domestic  sale  or  consumption  without  special  per- 
mission of  Treasury  Department.  Board  is  of 
opinion   that   member   banks   may   legally   accept 


BankAcceptances  49 

drafts  drawn  against  security  of  such  warehouse 
receipt  properly  assigned. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1918,  page  620.) 

A  draft  drawn  by  a  cooperative  marketing  asso-  Drafu  of 
ciation  is  eligible  for  acceptance  when  secured  at  the  aMadSioM 
time  of  acceptance  by  a  negotiable  warehouse  re- 
ceipt covering  nonperishable  agricultural  commodi- 
ties to  which  the  association  has  title  and  which  are 
stored  in  independent  warehouses. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1921,  page  963.) 
Ineligible  Security. 

Any  draft  which  is  drawn  to  carry  goods  for  Speculative 
speculative  purposes  or  for  any  indefinite  period  of  '  °"^* 
time  without  the  purpose  to  sell,  ship,  or  manufac- 
ture within  a  reasonable  time,  should  not  be  con- 
sidered eligible  for  acceptance  under  the  provisions 
of  section  13.  Such  a  draft  would  be  merely  a  cloak 
to  evade  the  restrictions  of  section  5200  of  the  Re- 
vised Statutes  and  is  not  one  of  the  kinds  which 
Congress  intended  to  make  ehgible  for  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  September,   1919,  page 
858.) 

A  draft  is  drawn  by  a  cotton  factor  and  secured  Drafts  of 
at  the  time  of  acceptance  by  a  warehouse  receipt  factor 
covering  cotton  consigned  to  the  factor  for  the  pur- 
pose of  sale.  Any  draft  drawn  under  the  circum- 
stances described,  where  it  appears  that  the  pro- 
ceeds are  to  be  used  not  for  a  commercial  purpose 
but  for  the  purpose  of  lending  to  the  factor's  cus- 
tomers, is  not  eligible  for  acceptance  by  a  member 
bank. 

(Ruling,  Federal   Reserve  Bulletin,   February,   1920,  page 
182.) 


I 


60  Commercial     Banking     Practice 

^^^^  Drafts  or  bills  of  exchange  drawn  in  domestic 

transactions  against  a  national  bank  can  not,  under 
authority  of  section  13,  be  accepted  when  secured 
by  a  chattel  mortgage  on  cattle  but  only  when  ac- 
companied by  shipping  documents  or  when  secured 
by  a  w^arehouse  receipt  or  other  similar  document 
conveying  or  securing  title  to  readilj'-  marketable 
staples.  I 

While  cattle  may  be  treated  as  readily  marketable 
staples,  a  chattel  mortgage  is  not  considered  a  docu- 
ment similar  to  a  warehouse  receipt,  since  the  bor- 
rower retains  the  possession  of  the  goods  and  con-  • 
veys  to  the  bank  only  the  legal  title. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1918,  page  309.) 

Collateral  A  national  bank  is  not  authorized  to  accept  a 

by  chattel  draft  sccurcd  by  collateral  notes  which  are  in  turn 

mortgage*  sccurcd  by  chattel  mortgages  on  cattle. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1917,  page 
690.) 

]Member  banks  are  not  authorized  to  accept  drafts 
of  a  cattle-loan  company  secured  by  notes  of  the 
owner  of  the  cattle,  although  such  notes  may  be  se- 
cured by  a  chattel  mortgage  executed  by  the  owner 
of  the  cattle  to  the  cattle-loan  company  and  the 
notes  and  chattel  mortgage  accompany  the  draft  at 
the  time  of  acceptance. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  Septem- 
ber, 1918,  page  871.) 

A  bill  of  sale  is  not  a  receipt  similar  to  a  ware- 
house or  terminal  receipt;  it  is  merely  in  substance 
a  chattel  mortgage  to  goods  in  the  hands  of  the 
drawer  and  not  a  receipt  for  goods  sold  in  the  hands 
of  some  third  party  "independent  of  the  borrower." 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1916,  page  684.) 


Bnis  of  tals 


Bank    Acceptances  61 

The  acceptance  of  a  draft  by  a  member  bank  Security  not 

■L  ^  specihed 

against  an  acceptance  agreement  which  purports 
to  assign  to  the  bank  certain  collateral  security,  but 
which  does  not  specifically  mention  any  security  as 
assigned,  is  an  ordinary  accommodation  acceptance, 
and  is  not  authorized  by  law. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  April,  191S, 
page  311.) 

Substitution  of  Warehouse  Receipts. 

It  is  held  that  there  is  no  objection  to  permitting  Substitution 
mills  to  substitute  other  warehouse  receipts  for  cot- 
ton receipts  during  the  life  of  an  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1917,  page  30.) 

For  rulings  governing  the  release  of  warehouse  Release 
receipts  after  acceptance,  see  pages  36-37,  above. 
See  also  Regulation  A,  Series  of  1920,  B,  pages 
135-137,  below. 

MATURITY 

Although  a  national  bank  may  accept  drafts  Acceptances 
drawn  upon  it  having  not  more  than  six  months'  renewal 
sight  to  run  which  are  secured  at  the  time  of  accept- 
ance by  a  warehouse  receipt  conveying  or  securing 
title  covering  readily  marketable  staples,  neverthe- 
less, such  an  acceptance  must  not  be  made  subject 
to  any  renewals. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  March, 
1920,  page  277.)  * 

A  member  bank  can  not  agree  unconditionally 
to  accept  a  renewal  draft  but  can  agi'ee  only  to  ac- 
cept in  the  event  that  the  renewal  draft  is  eligible 
for  acceptance  under  the  terms  of  the  law. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1921,  page  964>.) 


52  Commercial     Banking     Practice 

See  also  "Bank  Acceptances  Based  on  Domestic 
Shipments  of  Goods,"  pages  38-39,  above. 

AMOUNT  BANK  MAY  ACCEPT  FOR  ONE  INTEREST 

See  "Bank  Acceptances  Based  on  Imports  and 
Exports,"  pages  21-28,  above. 

AGGREGATE  AMOUNT  BANK  MAY  ACCEPT 

See    "Bank   Acceptances    Based    on    Domestic 
Shipments  of  Goods,"  pages  39-42,  above. 


Bank  Acceptances  Executed  to  Furnish 
Dollar  Exchange 

CHARACTER 

Statutory  Provisions 

Anv  member  bank  may  accept  drafts  or  bills  of  Acceptances 
exchange  dra^vn  upon  it  havmg  not  more  than  three  exchange 
months'  sight  to  run,  exclusive  of  days  of  grace, 
dra^vn  under  regulations  to  be  prescribed  by  the 
Federal  Reserve  Board  by  banks  or  bankers  in  for- 
eign countries  or  dependencies  or  insular  posses- 
sions of  the  United  States  for  the  purpose  of  fur- 
nisliing  dollar  exchange  as  required  by  the  usages 
of  trade  in  the  respective  countries,  dependencies, 
or  insular  possessions. 

(Federal  Reserve  Act^  Section   13.) 

Regulations  of  Federal  Reserve  Board 

Any  member  bank  desiring  to  accept  drafts  Application  for 
drawn  by  banks  or  bankers  in  foreign  countries  or  to  accept 
dependencies  or  insular  possessions  of  the  United 
States  for  the  purpose  of  furnishing  dollar  ex- 
change shall  first  make  an  application  to  the  Fed- 
eral Reserve  Board  setting  forth  the  usages  of  trade 
in  the  respective  countries,  dependencies,  or  insular 
possessions  in  which  such  banks  or  bankers  are 
located. 

If  the  Federal  Reserve  Board  should  determine  Conditions 
that  the  usages  of  trade  in  such  countries,  depen- 
dencies, or  possessions  require  the  granting  of  the 
acceptance  facilities  appHed  for,  it  will  notify  the 
applying  bank  of  its  approval  and  will  also  publish 


BankAcceptances  66 

in  the  Federal  Reserve  Bulletin  the  name  or  names 
of  those  countries,  dependencies,  or  possessions  in 
which  banks  or  bankers  are  authorized  to  draw  on 
member  banks  whose  applications  have  been  ap- 
proved for  the  purpose  of  furnishing  dollar  ex- 
change. 

The  Federal  Reserve  Board  reserves  the  right 
to  modify  or  on  ninety  days'  notice  to  revoke  its  ap- 
proval either  as  to  any  particular  member  bank  or 
as  to  any  foreign  country  or  dependency  or  insular 
possession  of  the  United  States  in  which  it  has  au- 
thorized banks  or  bankers  to  draw  on  member  banks 
for  the  purpose  of  furnishing  dollar  exchange. 

(Regulation  C,  Series  of  1920,  B,  II.) 

Announcements  of  Federal  Reserve  Board 

The  purpose  of  this  Act  and  the  regulation  made  Purpose  of 
pursuant  thereto  was  to  enable  the  American  banks 
to  provide  dollar  exchange  in  countries  where  the 
check  is  not  the  current  means  of  remittance  in  pay- 
ment of  foreign  debts,  but  where  the  three  months' 
bankers'  draft  is  generally  used  for  that  purpose. 

The  Board  is  informed  that  the  bankers'  custom 
of  selling  three  months'   drafts  in  preference  to  Origin  of 
checks  originated  in  countries  where  the  mail  con-  il,""^"e 
nections  were  irregular  and  the  foreign  exchange  such  accept- 
market  was  a  limited  one,  and  where  it  would  have 
been  difficult  for  the  drawing  banker  to  be  certain 
that  he  could  find  a  cover  against  the  checks  drawn 
by  him  in  time  to  forward  it  by  the  same  mail, 
whereas,  in  drawing  a  three  months'  draft,  he  would 
feel  assured  of  being  able  to  forward  remittances 
before  his  obligation  fell  due.     Such  conditions  do 
not  exist  in  relations  between  England  and  France 
and  the  United  States. 

(Announcement,  Federal  Reserve  Bulletin,  December,  1916, 
page  665.) 


66 


Commercial     Banking     Practice 


Countries 
whose  trade 
usages  warrant 
such  accept- 
ances 


Central  and 
South  America 


Permission 
extended 


Under  the  provisions  of  section  13  of  the  Federal 
Reserve  Act,  which  provides  that  member  banks, 
with  the  approval  of  the  Federal  Reserve  Board, 
may  accept  drafts  for  the  pm-pose  of  furnishing 
dollar  exchange,  drawn  upon  them  by  banks  or 
bankers  located  in  foreign  countries  or  dependen- 
cies or  insular  possessions  of  the  United  States  in 
which  it  is  determined  that  the  usages  of  trade  re- 
quire such  acceptance  facilities,  the  Board  has  des- 
ignated as  such  the  following  countries  and  insular 
possessions:  Argentina,  Bolivia,  Brazil,  British 
Guiana,  British  Honduras,  Chile,  Colombia,  Costa 
Rica,  Cuba,  Dutch  Guiana,  Ecuador,  French  Gui- 
ana, Guatemala,  Honduras,  Nicaragua,  Panama, 
Paraguay,  Peru,  Porto  Rico,  San  Salvador,  Santo 
Domingo,  Trinidad,  Uruguay,  and  Venezuela. 

(Announcement,  Federal  Reserve  Bulletin,  November,  1920, 
page  1175.) 

]\Iember  banks  with  the  approval  of  the  Federal 
Reserve  Board  majj-  accept  drafts  for  the  purpose 
of  furnishing  dollar  exchange  drawn  upon  them 
by  banks  or  bankers  located  in  Australia,  New  Zea- 
land and  other  Australasian  dependencies.  [Special 
application  is  required  in  these  cases.] 

(Announcement,  Federal  Reserve  Bulletin,  February,  1921, 
page  188.) 

Opinions  and  Rulings 

The  Federal  Reserve  Board  has  not  rescinded  its 
vote  to  permit  member  banks  to  accept  drafts 
drawn  upon  them  by  banks  or  bankers  in  anj^  Cen- 
tral or  South  American  country  for  the  purpose  of 
creating  dollar  exchange.  Permission  granted  to  a 
member  bank  with  respect  to  any  country  entitles 
it  to  exercise  similar  accepting  powers  with  respect 
to  all  countries  that  have  been  or  may  hereafter  be 


BankAcceptances  57 

'designated  by  the  Board  as  countries  whose  usages 
of  trade  require  the  furnishing  of  dollar  exchange. 
(Ruling,  Federal  Reserve  Bulletin,  November,  1918,  page 
1119.) 

If  a  national  bank  wishes  to  accept  drafts  for  the  JjS['"f""t 
purpose  of  furnishing  dollar  exchange  with  respect  to  other 
to  a  country  as  to  which  no  previous  application  has  """  " 
been  granted,  it  should  submit  to  the  Board  evi- 
dence that  the  usages  of  trade  in  that  country  are 
such  as  to  require  the  drawing  of  drafts  of  this 
character.  An  appHcation  can  not  be  granted, 
therefore,  if  it  appears  that  the  drafts  are  to  be 
drawn  not  because  the  usages  of  trade  so  require 
but  merely  because  dollar  exchange  is  at  a  premium 
in  the  country  where  the  drafts  are  to  be  drawn. 
This  ruhng,  of  course,  has  no  bearing  upon  the 
question  of  whether  particular  drafts  are  eligible 
for  acceptance  by  member  banks  as  drafts  which 
grow  out  of  transactions  involving  the  importation 
or  exportation  of  goods. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1920,  page  835.) 

MATURITY 

Statutory  Provisions 

Any  member  bank  may  accept  drafts  or  bills  ^^^'J^""" 
of  exchange  drawn  upon  it  [to  furnish  dollar  ex-  months 
change]  having  not  more  than  three  months'  sight 
to  run,  exclusive  of  days  of  grace. 

(Federal  Reserve  Act,  Section  13.) 

AMOUNT  MEMBER  BANK  MAY  ACCEPT  FOR 

ONE  INTEREST 

Statutory  Provisions 

No  member  bank  shall  accept  such  drafts  or  bills  Ten^per  cent. 
of  exchange  referred  to  in  this  paragraph  for  any 


68 


Commercial     Banking     Practice 


Fifty  per  cent 
limit 


Limit  is  ex- 
clusive 


Section  5202 
not  applicable 


one  bank  to  an  amount  exceeding  in  the  aggregate 
ten  per  centum  of  the  paid-up  and  unimpaired  cap- 
ital and  surplus  of  the  accepting  bank  unless  the 
draft  or  bill  of  exchange  is  accompanied  by  docu- 
ments conveying  or  securing  title  or  by  some  other 
adequate  security. 

(Federal  Reserve  Act,  Section  13.) 

AGGREGATE  AMOUNT  MEMBER  BANK  MAY 
ACCEPT 

Statutory  Provisions 

No  member  bank  shall  accept  such  drafts  or  bills 
in  an  amount  exceeding  at  any  time  the  aggregate 
of  one-half  of  its  paid-up  and  unimpaired  capital 
and  surplus. 

(Federal  Reserve  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Board 

This  fifty  per  cent,  limit  is  separate  and  distinct 
from  and  not  included  in  the  limits  placed  upon  the 
acceptance  of  drafts  and  bills  of  exchange.  .  .  . 
[drawn  against  domestic  or  foreign  shipments  or 
secured  by  warehouse  receipts.] 

(Regulation  C,  Series  of  1920,  B,  I.) 

Opinions  and  Rulings 

The  limitations  imposed  by  section  5202,  Revised 

Statutes,  on  the  habilities  incurred  by  any  national 

bank  do  not  apply  to  acceptances  of  such  banks. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1916,  page  680.) 


Letters  of  Credit  and  Acceptances  Issued 
for  Correspondents 

Opinions  and  Rulings 

The  Comptroller  of  the  Currency  has  ruled,  un-  Agendesof 
der  section  5190,  United  States  Revised  Statutes,  J^J^ 
that  a  national  bank  located  in  California  may  not 
appoint  an  agent  in  Xew  York  to  accept  in  behalf 
of  the  bank  drafts  drawn  on  it  payable  in  New 
York  and  to  pay  such  drafts  out  of  the  funds  de- 
posited in  New  York  under  the  control  of  the 
agent. 

(Federal  Reserve  Bulletin,  August,  1920,  page  835.) 

National  banks  for  some  time  have  been  accus-  Guarantee  of 
tomed  to  guarantee  letters  of  credit  issued  at  their  oia'dn 
request  by  correspondent  banks  in  large  centers  on 
behalf  of  the  national  bank's  customers.  For  in- 
stance, it  appears  that  where  the  customer  of  an  in- 
terior national  bank  desires  to  obtain  a  letter  of 
credit  in  connection  with  his  foreign  business,  the 
national  bank,  instead  of  issuing  the  letter  itself, 
will  get  one  of  its  large  city  correspondents  to  issue 
a  letter  for  the  customer's  account,  which  the  na- 
tional bank  guarantees;  that  is,  the  national  bank 
agrees  that  in  the  event  the  customer  for  whose  ac- 
count the  letter  is  issued  fails  to  put  the  issuing 
bank  in  funds  to  meet  the  acceptances,  the  guar- 
anteeing bank  will  do  so.  The  transaction  does  not 
always  involve  the  issuance  of  a  letter  of  credit,  for 
the  correspondent  bank  sometimes  simply  accepts  a  Guarantee  of 

t       p       -,  ■      I  ■  1    1*       1  5  acceptances 

drait  drawn  upon  it  by  the  national  bank  s  cus- 
tomer, and  the  national  bank,  in  a  collateral  agree- 
ment "v^ith  the  correspondent  bank,  guarantees  the 


60  Commercial     Banking     Practice 

customer's  obligation  to  put  the  correspondent  bank 
in  funds  to  meet  the  acceptance.  Under  the  latter 
arrangement,  the  national  bank's  liabihty  is  the 
same  as  the  ultimate  liability  which  arises  out  of 
guaranteeing  a  letter  of  credit,  so  that  the  two 
transactions  will  be  considered  as  one  and  the  same 
for  the  purposes  of  this  discussion. 
intra  Wliether  or  not  a  national  bank  has  authority  to 

^  guarantee  a  letter  of  credit  is  a  question  of  law 

which  in  the  last  analysis  must  be  determined  by 
the  courts.  The  Federal  Reserve  Board  is  of  the 
opinion  that  a  national  bank  has  no  authority  to 
guarantee  or  act  as  surety  upon  a  letter  of  credit; 
that  such  acts  are  ultra  vires ;  and  that  if  the  direc- 
tors of  a  national  bank  enter  into  such  contracts  of 
guaranty  or  suretyship,  they  assume  in  their  per- 
sonal capacities  the  risk  of  any  loss  that  may  occur. 

AitemaiiTe  The   Board   desires   to    suggest   an   alternative 

"«*^  method  of  financing  the  business  heretofore  financed 

by  means  of  letters  of  credit  guaranteed  by  the 
national  banks  at  whose  request  the  letters  are  is- 
sued. The  Board  is  of  the  opinion  that  this  course, 
if  adopted,  will  enable  a  national  bank,  with  only 
slight  modifications  as  to  the  manner  of  handling 
the  business,  to  continue  to  carry  it  on  ^\athout  en- 
tering into  an  ultra  vires  transaction.  Take  the 
case  of  a  national  bank  in  an  interior  community, 
whose  customer  ^^ashes  to  obtain  a  letter  of  credit 
which  will  be  satisfactory  to  his  foreign  dealer.  The 
national  bank,  having  no  international  standing,  or 
being  without  any  department  capable  of  handling 
foreign  business,  does  not  wish  to  issue  the  letter 
itself  but  is  willing  to  extend  its  credit  to  its  cus- 
tomer. Under  these  circumstances,  it  enters  into 
an  arrangement  with,   say,  its  Xew  York  corre- 


BankAcceptances  61 

"spondent,  whereby  the  New  York  correspondent  Agency 
agrees  as  agent  of  the  interior  bank  to  issue  a  letter  ^^""®"' 
of  credit  for  the  account  of  the  interior  bank's  cus- 
tomer, the  letter  to  be  issued  in  the  name  of  the 
Xew  York  correspondent,  but  in  issuing  the  letter 
the  New  York  correspondent  is  to  act  as  agent  for 
an  undisclosed  principal,  namely,  the  interior  bank. 
The  interior  bank's  name  will  not  appear  on  the 
letter  of  credit,  but  its  New  York  correspondent 
may  look  to  it  for  reimbursement  under  the  col- 
lateral agency  agreement,  not  conditionally  upon 
the  failure  of  the  customer  to  put  the  issuing  bank 
in  funds  but  directly  and  unconditionally  as  the 
real  issuer  of  the  letter.  The  beneficiary  of  the 
letter  and  the  holders  of  the  acceptances  drawn 
thereunder  will  look  to  and  relj^  on  the  credit  of 
the  New  York  bank,  for  its  name  alone  will  appear 
on  the  letter  and  the  acceptances,  but  the  interior 
bank  will  in  fact  be  the  real  acceptor  and  the  cus- 
tomer will  be  under  obligation  to  put  the  interior 
bank,  not  the  New  York  bank,  in  funds  to  meet 
the  acceptances  as  they  mature.  The  only  change 
necessary  in  the  present  method  is  that  the  interior 
bank,  instead  of  guaranteeing  the  letter  of  credit, 
will  execute  a  separate  contract  appointing  its  New 
York  correspondent  its  agent,  and  agreeing  uncon- 
ditionally to  reimburse  the  agent  as  such  for  any 
;  moneys  paid  out,  or,  if  desired,  to  put  the  agent  in 
funds  to  meet  the  acceptances  as  they  mature.  It 
would  seem  that  this  procedure  will  meet  the  prac- 
tical requirements  of  the  situation  and  at  the  same 
time  avoid  the  necessity  of  any  contract  of 
guaranty. 

The  Board  is  of  the  opinion  that  the  provisions  Agent  for 

n  '  -t  '^  •  1    specinc 

of  section  5190  do  not  necessarily  prevent  a  national  purpose 


62  Commercial     Banking     Practice 


bank  from  appointing  another  bank  or  banker  as  its 
agent  to  issue  a  letter  of  credit  in  the  agent's  name. 
It  is  well  recognized  that,  while  a  national  bank 
may  not  transact  any  part  of  its  "usual  business" 
at  another  place  through  an  agent,  nevertheless  it 
may  appoint  an  agent  for  specific  purposes  or  to 
transact  particular  kinds  of  business.  Under  these 
circumstances,  it  would  seem  that  a  national  bank, 
for  the  purpose  of  financing  its  customer's  business 
in  the  manner  herein  suggested,  maj^  appoint  a 
domestic  or  foreign  bank  or  banker  as  its  agent  to 
issue  in  the  agent's  own  name  a  letter  of  credit  and 
to  accept  drafts  drawn  thereunder,  provided,  that 
the  authority  conferred  is  specifically  limited  to  the 
particular  transaction  involved  and  that  a  definite 
limitation  is  imposed  upon  the  amount  of  each 
letter  of  credit. 

'il^Sui  ^^  ^^^^  ^^^  course  suggested  should  be  adopted, 

and  agent  the  agent  bank,  which  issues  the  letter  and  which 

is  primarily  and  unconditionally  liable  upon  the 
acceptances  made  thereunder,  must  include  the 
liabilitj^  on  such  acceptances,  as  and  when  incurred, 
among  its  general  acceptance  liabilities  subject  to 
the  limitations  on  the  acceptance  power  prescribed 
b}^  law;  and,  inasmuch  as  the  interior  bank  is  by 
hypothesis  the  real  acceptor  and  is  directly  and  un- 
conditionally liable  to  the  agent  bank  for  any 
moneys  paid  out  to  meet  the  acceptances  as  they 
mature  or  to  put  the  accepting  bank  in  funds  to 
meet  such  acceptances,  the  principal  bank  also  must 
include  the  amount  of  the  acceptances,  as  and  when 
made,  among  its  general  acceptance  liabilities  sub- 
ject to  the  limitations  of  law. 

It   should   be   remembered   that    the    foregoing 
merely  represents  the  Board's  opinion  as  to  the 


I 


BankAcceptances  63 

legality  of  the  proposed  plan,  and  as  to  the  require- 
ments which  must  be  complied  with  if  national 
banks  see  fit  to  adopt  the  plan.  In  the  last  analysis, 
the  question  whether  a  national  bank  legally  may  Question 
appoint  a  correspondent  as  its  agent  in  particular 
transactions  to  issue  a  letter  of  credit  and  to  accept 
drafts  drawn  thereunder,  and  whether  in  other  re- 
spects a  national  bank  legally  may  transact  the 
business  in  the  manner  suggested,  is  a  question  for 
the  determination  of  the  courts.  It  seems  advisable, 
however,  for  the  Board  to  set  forth  its  views  with 
regard  to  the  matter  under  discussion  in  order  that 
its  position  may  be  clearly  understood. 

This  opinion  has  been  submitted  to  the  Comp- 
troller of  the  Currency  and  he  concurs  in  the  views 
expressed  therein. 

(Federal  Reserve  Bulletin,  May,  1921,  page  547.) 


Section  5200, 
Revised  Statutes 


Ten  per  cent 
limit  on  loans 
to  one  interest 


BUIs  of 
exchange 
and  bank 
acceptances 


Business 
paper 


Documentary 
notes 


Investment  in  Bank  Acceptances  by 
National  Banks 

Statutory  Provisions 

The  total  liabilities  to  any  association  of  any 
person  or  of  any  company,  corporation,  or  firm  for 
money  borrowed,  including  in  the  liabihties  of  a 
company  or  firm  the  liabilities  of  the  several  mem- 
bers thereof,  shall  at  no  time  exceed  ten  per  centum 
of  the  amoimt  of  the  capital  stock  of  such  associa- 
tion, actually  paid  in  and  unimpaired,  and  ten  per 
centum  of  its  unimpaired  surplus  fund:  Provided^ 
hotvever.  That  ( 1 )  the  discount  of  bills  of  exchange 
draTVTi  in  good  faith  against  actually  existing 
values,  including  drafts  and  bills  of  exchange  se- 
cured by  shipping  documents  conveying  or  secur- 
ing title  to  goods  shipped,  and  including  demand 
obligations  when  secured  by  documents  covering 
commodities  in  actual  process  of  shipment,  and  also 
including  bankers'  acceptances  of  the  kinds  de- 
scribed in  section  13  of  the  Federal  Reserve  Act, 
(2)  the  discount  of  commercial  or  business  paper 
actually  owned  by  the  person,  company,  corpora- 
tion, or  firm  negotiating  the  same,  (3)  the  discount 
of  notes  secured  by  shipping  documents,  ware- 
house receipts,  or  other  such  documents  conveying 
or  securing  title  covering  readily  marketable 
nonperishable  staples,  including  live  stock,  when 
the  actual  market  value  of  the  property  securing 
the  obligation  is  not  at  any  time  less  than 
115  per  centum  of  the  face  amount  of  the 
notes  secured  by  such  documents  and  when 
such  property  is  fully  covered  by  insurance,  and 
(4)  the  discount  of  anj^  note  or  notes  secured  by 


1 


BankAcceptances  65 

Dot  less  than  a  like  face  amount  of  bonds  or  notes  Notes 
of  the  United  States  issued  since  April  24,  1917,  iSd  ^ 
or  certificates  of  indebtedness  of  the  United  States,  ^Jf'^tj*^^ 
shall  not  be  considered  as  money  borrowed  within 
the  meaning  of  this  section.  The  total  liabilities  to 
any  association,  of  any  person  or  of  any  corpora- 
tion, or  firm,  or  company,  or  the  several  members 
thereof  upon  any  note  or  notes  purchased  or  dis- 
counted by  such  association  and  secured  by  bonds, 
notes,  or  certificates  of  indebtedness  as  described  in 
(4)  hereof  shall  not  exceed  (except  to  the  extent 
permitted  by  rules  and  regulations  prescribed  by 
the  Comptroller  of  the  Currency,  ^yi\:h.  the  approval 
of  the  Secretan*^  of  the  Treasury)  ten  per  centum 
of  such  capital  stock  and  surplus  fund  of  such  asso- 
■ciation  and  the  total  liabilities  to  any  association 
of  any  person  or  of  any  corporation,  or  firm,  or 
(Company,  or  the  several  members  thereof  for  money 
.borrowed,  including  the  liabilities  upon  notes  se- 
icured  in  the  manner  described  under  (3)  hereof,  ex- 
cept transactions  (1),  (2),  and  (4),  shall  not  at  any  Limitation  on 
time  exceed  twentv-five  per  centum  of  the  amount  [documentary 
3f  the  association's  paid-in  and  unimpaired  capital 
-stock  and  surplus.  The  exception  made  under  (3) 
ihereof  shall  not  apply  to  the  notes  of  any  one  per- 
i3on,  corporation  or  firm  or  company,  or  the  several 
lOiembers  thereof  for  more  than  six  months  in  any 
consecutive  twelve  months. 

(National    Bank   Act,    Section    5200,    Revised    Statutes,   as 
amended  October  22,  1919.) 


Opinions  and  Rulings 

Purchase  or  Discount  of  Acceptances  of  Other  Banks.  „_...      . 

.  exchange"  include 

"Bills  of  exchange"  may  be  taken  as  including  bank  acceptances 


66 


Commercial     Banking     Practice 


Bills  discounted 
before  acceptance 


Secured  by  shipping 
documents  or 
pledge  of  goods 


Discount  of 
acceptances 
as  business 
paper 


acceptances,  since  a  bill  does  not  lose  its  character- 
istics as  such  when  accepted  by  the  drawee. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  March, 
1917,  page  195.) 

A  bill  of  exchange  discounted  before  acceptance 
may  be  said  to  be  drawn  against  actually  existing 
value  only  when  it  is  accompanied  by  shipping 
documents,  warehouse  receipts,  or  other  papers  se- 
curing title  to  the  goods  sold. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  March, 
1917,  page  195.) 

A  bill  secured  by  shipping  documents,  or  by  the 
pledge  of  goods  actually  sold,  might  be  discounted 
by  a  member  bank  before  acceptance  without  being 
subject  to  the  limitations  imposed  by  section  5200, 
since  this  would  constitute  a  bill  drawn  in  good 
faith  against  actually  existing  value. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1916,  page  683.) 

The  Board  finds  it  necessary  to  adhere  to  its 
established  policy  of  not  making  any  general  ruling 
on  the  question  of  how  much  a  bank  may  invest  in 
any  particular  security.  It  holds,  however,  that  if 
a  firm  is  a  bona  fide  owner  for  value  of  the  accept- 
ances of  any  particular  institution  and  such  accept- 
ances are  sold  to  or  discounted  with  a  member  bank, 
the  acceptances  could  no  doubt  be  treated  as  com- 
mercial or  business  paper  actually  owned  by  the 
party  negotiating  them  and  would  therefore  be 
excepted  from  the  limitation  of  section  5200,  Re- 
vised Statutes. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1916,  page 
678.) 


Bank     Acceptances  67 

A  bill  rediscounted  in  good  faith  by  a  member  Rediscounted 
bank,  which  is  no  longer  owTied  or  held  by  the  bank,  iSed  by 
need  not  be  included  as  a  liabihty  of  the  maker  to  "*^*"°"  ^^^ 
the  bank  within  the  meaning  of  section  5200,  Re- 
vised Statutes.    Bills  rediscounted  under  an  agree- 
ment to  repurchase,  or  which  are  merely  credited 
to  the  account  of  the  bank  offering  them  for  redis- 
count, are  subject  to  the  limitations  of  section  5200. 

(Opinion   of   Counsel,   Federal   Reserve   Bulletin,   Septem- 
ber, 1918,  page  867.) 

It  appears  that  some  national  banks,  in  consid-  indorsement 

,•/>/>  •      •  L  T    1.      fof  accommo- 

eration  or  a  tee  or  commission,  are  accustomed  to  daji^n 
indorse  acceptances  for  the  accommodation  of  their 
customers  or  bill  brokers.  Whether  or  not  a  na- 
tional bank  has  authority  to  indorse  an  acceptance 
for  accommodation  is  a  question  of  law  which  in  the 
last  analysis  must  be  determined  by  the  courts.  The 
Federal  Reserve  Board  is  of  the  opinion  that  a  na- 
tional bank  has  no  authority  to  indorse  an  accept- 
ance for  accommodation,  and  that  such  act  is  ultra 
vires. 

However,  a  national  bank  may  purchase  an  ac- 
ceptance and  immediately  resell  it  with  its  indorse- 
ment, since  the  power  to  indorse  acceptances  is  in- 
cidental to  the  power  to  negotiate  acceptances. 
There  appears  to  be  no  authority  of  law  which  per- 
mits a  national  bank  to  lend  its  credit  by  indorsing 
an  acceptance  where  the  transaction  does  not  in- 
volve an  actual  transfer  of  title  to  and  from  the 
national  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  May,  1921. 
page  547.) 

Purchase  by  National  Bank  of  its  own  Acceptances. 

A  member  bank  may  legally  purchase  its  own  p^g"^^,, 
acceptances,  but  such  a  transaction  is  equivalent  to  own  acceptances 


68 


Commercial     Banking     Practice 


Exemption  from 
limitations  of 
section  13 


Reissuance  of 
acceptances 


Rediscount  of 
such  acceptances 


a  loan  or  advance  to  the  customer  for  whom  the 
acceptance  was  made  and  the  hability  of  such  cus- 
tomer becames  subject  to  the  hmitations  of  section 
5200,  Revised  Statutes. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  Decem- 
ber, 1916,  page  680.) 

When  a  bank  purchases  its  own  acceptance  be- 
fore maturity  such  acceptance  need  not  be  included 
in  the  aggregate  of  acceptances  authorized  by  sec- 
tion 13. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  August, 
1916,  page  397.) 

While  the  Board  has  ruled  that  when  a  bank  buys 
its  own  acceptances  they  are  to  be  recorded  as  loans 
subject  to  the  limitations  of  section  5200,  the  right 
of  the  bank  to  resell  or  reissue  the  acceptance  is,  in 
the  opinion  of  counsel,  fully  recognized  by  the  au- 
thorities, and  where  this  is  done  they  may  be  treated 
as  acceptances  outstanding  and  not  as  loans. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  Septem- 
ber, 1917,  page  691.) 

An  acceptance  which  has  been  purchased  by  the 
accepting  bank  and  subsequently  rediscounted  with 
its  Federal  reserve  bank  is  not  subject  to  the  lim- 
itations of  section  5200  of  the  Revised  Statutes. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  Septem- 
ber, 1917,  page  696.) 


PART  II. 

Rediscounts  with  Federal 
Reserve  Banks 

General  Statutory  Provisions 

Upon  the  indorsement  of  any  of  its  member  Notes,  drafts,  and 
banks,  which  shaU  be  deemed  a  waiver  of  demand,  buu  of  exchange 
notice  and  protest  by  such  bank  as  to  its  own  in- 
dorsement exclusive^,  any  Federal  reserve  bank 
may  discount  notes,  di-afts,  and  bills  of  exchange 
arising  out  of  actual  commercial  transactions;  that  Commercial  paper 
is,  notes,  drafts,  and  bills  of  exchange  issued  or 
drawn  for  agricultural,  industrial,  or  commercial 
purposes,  or  the  proceeds  of  wliich  have  been  used, 
or  are  to  be  used,  for  such  purposes,  the  Federal 
Reserve  Board  to  have  the  right  to  determine  or 
define  the  character  of  the  paper  thus  ehgible  for 
discount,  within  the  meaning  of  this  Act.    Nothing 
in  this  Act  contained  shall  be  construed  to  prohibit 
such  notes,  drafts,  and  bills  of  exchange,  secured  by  ^^'"Ijf!'  "^^ 

'  '  <-''•'     commodity  paper 

staple  agricultural  products,  or  other  goods,  wares, 
or  merchandise,  from  being  eligible  for  such  dis- 
count; but  such  definition  shall  not  include  notes, 

'  .         Ineligible  paper 

drafts,  or  bills  covering  merely  mvestments  or  is- 
sued or  dra^^m  for  the  purpose  of  carrying  or  trad- 
ing in  stocks,  bonds,  or  other  investment  securities, 
except  bonds  and  notes  of  the  Government  of  the 
United  States.  Notes,  drafts,  and  bills  admitted  S^^^p^',, 
to  discount  under  the  terms  of  this  paragraph  must 
have  a  maturity  at  the  time  of  discount  of  not  more 


70 


Amount  rediscount- 
able  by  one  bank 
bearing  signature 
of  any  one  interest 


Bank  acceptances 
eligible  for 
rediscount 


Subject  to  reg- 
ulations of 
Federal  Reserre 
Board 


I 


Commercial     Banking     Practice 

than  ninety  days,  exclusive  of  days  of  grace:  Pro- 
vided, That  notes,  drafts,  and  bills  drawn  or  issued 
for  agricultural  purposes  or  based  on  Hve  stock 
and  having  a  maturity  not  exceeding  six  months, 
exclusive  of  days  of  grace,  maj^  be  discounted  in  an 
amount  to  be  limited  to  a  percentage  of  the  assets 
of  the  Federal  reserve  bank,  to  be  ascertained  and 
fixed  by  the  Federal  Reserve  Board. 

The  aggregate  of  such  notes,  drafts,  and  bills 
bearing  the  signature  or  indorsement  of  any  one 
borrower,  whether  a  person,  company,  firm,  or  cor- 
poration, rediscounted  for  any  one  bank,  shall  at  no 
time  exceed  ten  per  centum  of  the  unimpaired  capi- 
tal and  surplus  of  said  bank;  but  this  restriction 
shall  not  apply  to  the  discount  of  bills  of  exchange  j 
drawn  in  good  faith  against  actually  existing 
values.  ■ 

Any  Federal  reserve  bank  may  discount  accept-  f 
ances  of  the  kinds  hereinafter  described,*  which 
have  a  maturity  at  the  time  of  discount  of  not  more 
than  three  months'  sight,  exclusive  of  days  of  gi'ace, 
and  which  are  indorsed  by  at  least  one  member 
bank. 


The  discount  and  rediscount  and  the  purchase 
and  sale  h\  any  Federal  reserve  bank  of  any  bills 
receivable  and  of  domestic  and  foreign  bills  of  ex- 
change, and  of  acceptances  authorized  by  this  Act, 
shall  be  subject  to  such  restrictions,  limitations,  and 
regulations  as  may  be  imposed  by  the  Federal  Re- 
serve Board.  M 

Such  drafts  or  bills  [to  provide  dollar  exchange] 

*  See  Part  I,  "General  Statutory  Provisions/'  pages  9-10, 
above. 


I 


Rediscounts  71 

jmay  be  acquired  by  Federal  reserve  banks  in 
such  amounts  and  subject  to  such  regulations, 
restrictions,  and  limitations  as  may  be  prescribed 
by  the  Federal  Reserve  Board. 

(Federal  Reserve  Act^  Section  13.) 

'No  Federal  reserve  bank  shall  be  permitted  to  Rediscounts 
discount  for  any  [member]  State  bank  or  trust  sYaJ^b'S^s 
company  notes,  drafts,  or  bills  of  exchange  of  any 
one  borrower  who  is  liable  for  borrowed  money  to 
such  State  bank  or  trust  company  in  an  amount 
greater  than  ten  per  centum  of  the  capital  and  sur- 
plus of  such  State  bank  or  trust  company,  but  the 
discount  of  bills  of  exchange  drawn  against  actually 
existing  value  and  the  discount  of  commercial  or 
business  paper  actually  owned  by  the  person  nego- 
tiating the  same  shall  not  be  considered  as  borrowed 
money  within  the  meaning  of  this  section.  The  Conditions 
Federal  reserve  bank,  as  a  condition  of  the  discount 
of  notes,  drafts,  and  bills  of  exchange  for  such  State 
bank  or  trust  company,  shall  require  a  certificate 
or  guaranty  to  the  effect  that  the  borrower  is  not 
liable  to  such  bank  in  excess  of  the  amount  provided 
by  this  section,  and  will  not  be  permitted  to  become 
liable  in  excess  of  this  amount  while  such  notes, 
drafts,  or  bills  of  exchange  are  under  discount  with 
the  Federal  reserve  bank. 

(Federal  Reserve  Act,  Section  9.) 

Upon  the  affirmative  vote  of  not  less  than  five  of  Re<ii«ount» 
its  members,  the  Federal  Reserve  Board  shall  have  until  October 
power  to  permit  Federal  reserve  banks  to  discount  ^''  *'^* 
for  any  member  bank  notes,  drafts,  or  bills  of  ex- 
change bearing  the  signature  or  endorsement  of  any 
one  borrower  in  excess  of  the  amount  permitted  by 
section  9  and  section  13  of  this  Act,  but  in  no  case 
to  exceed  twenty  per  centum  of  the  member  bank's 


72 


Commercial     Banking     Practice 


Security  of 
War  Finance 
Corporation 
bonds 


Procuring  dis- 
counts for 
nonmembers 


Aggregate 
accommodations 


capital  and  surplus:  Provided,  however.  That  all 
such  notes,  drafts,  or  bills  of  exchange  discounted 
for  any  member  bank  in  excess  of  the  amount  per- 
mitted under  such  sections  shall  be  secured  by  not 
less  than  a  hke  face  amount  of  bonds  or  notes  of  the 
United  States  issued  since  April  24>.,  1917,  for  which 
the  borrower  shall  in  good  faith  prior  to  January  1, 
1921,  have  paid  or  agreed  to  pay  not  less  than  the 
full  face  amount  thereof,  or  certificates  of  indebted- 
ness of  the  United  States :  Provided  further.  That 
the  provisions  of  this  subsection  (m)  shall  not  be 
operative  after  October  31,  1921. 
(Federal  Reserve  Act,  Section  11  (m).) 

The  Federal  reserve  banks  shall  be  authorized, 
subject  to  the  maturity  limitations  of  the  Federal 
Reserve  Act  and  to  regulations  of  the  Federal  Re- 
serve Board,  ...  to  rediscount  eligible  paper  se- 
cured by  .  .  .  bonds  [of  the  War  Finance  Cor- 
poration] and  indorsed  by  a  member  bank.  No 
discount  or  rediscount  under  this  section  shall  be 
granted  at  a  less  interest  charge  than  one  per 
centum  per  annum  above  the  prevailing  rates  for 
eligible  commercial  paper  of  corresponding  ma- 
turity. 

(War  Finance  Corporation  Act,  Section  13.) 

'No  member  bank  shall  act  as  the  medium  or 
agent  of  a  nonmember  bank  in  applying  for  or  re- 
ceiving discounts  from  a  Federal  reserve  bank  un- 
der the  provisions  of  this  Act,  except  by  permis- 
sion of  the  Federal  Reserve  Board. 

(Federal  Reserve  Act^  Section  19.) 

Said  board  [of  directors  of  each  Federal  reserve 
bank]  shall  administer  the  affairs  of  said  bank 
fairly  and  impartially  and  without  discrimination 
in  favor  of  or  against  any  member  bank  or  banks 


Rediscounts  78 

and  shall,  subject  to  the  provisions  of  law  and  the 
orders  of  the  Federal  Reserve  Board,  extend  to 
each  member  bank  such  discounts,  advancements 
and  accommodations  as  may  be  safely  and  reason- 
ably made  with  due  regard  for  the  claims  and  de- 
mands of  other  member  banks. 
(Federal  Reserve  Act,  Section  4.) 

General  Regulations  of  Federal 
Reserve  Board 

SUMMARY  OF  STATUTORY  PROVISIONS 

Any  Federal  reserve  bank  may  discount  for  any 
of  its  member  banks  any  note,  draft,  or  bill  of  ex- 
change, provided — 

(a)  It  has  a  maturity  at  the  time  of  discount  Maturity 
of  not  more  than  ninety  days,  exclusive  of  days  of 
grace ;  but  if  drawn  or  issued  for  agricultural  pur- 
poses or  based  on  live  stock,  it  may  have  a  maturity 

at  the  time  of  discount  of  not  more  than  six  months, 
exclusive  of  days  of  grace. 

(b)  It  arose  out  of  actual  commercial  transac-  Commercial 
tions ;  that  is,  it  must  be  a  note,  draft,  or  bill  of  ex-  ^  "**^  *' 
change  which  has  been  issued  or  drawn  for  agricul- 
tural, industrial,  or  commercial  purposes,  or  the  pro- 
ceeds of  which  have  been  used  or  are  to  be  used 

for  such  purposes. 

(c)  It  was  not  issued  for  carrying  or  trading  in  Rnance paper 
stocks,  bonds,  or  other  investment  securities,  except  '"«''s«bie 
bonds  and  notes  of  the  Government  of  the  United 
States. 

(d)  The  aggregate  of  notes,  drafts,  and  bills  Ten  per  cent 
bearing  the  signature  or  indorsement  of  any  one 
borrower,  whether  a  person,  company,  firm,  or  cor- 
poration, rediscounted  for  any  one  member  bank, 
whether  State  or  National,  shall  at  no  time  exceed 


74 


Commercial     Banking     Practice 


Indorsement 


Rediscounts 
for  member 
State  banks 


ten  per  cent.*  of  the  unimpaired  capital  and  surplus 
of  such  bank ;  but  this  restriction  shall  not  apply  to 
the  discount  of  bills  of  exchange  drawn  in  good 
faith  against  actually  existing  values. 

(e)  It  is  indorsed  by  a  member  bank. 

(f)  It  conforms  to  all  apphcable  provisions  of 
this  regulation. 

No  Federal  reserve  bank  may  discount  for  any 
member  State  bank  or  trust  company  any  of  the 
notes,  drafts,  or  bills  of  any  one  borrower  who  is 
liable  for  borrowed  money  to  such  State  bank  or 
trust  company  in  an  amount  greater  than  ten  per 
cent.f   of  the  capital  and  surplus  of  that    State 

*  Under  the  terms  of  Section  11  (m)  as  amended  by  the 
Act  of  February  27,  1921,  a  Federal  reserve  bank  may,  until 
October  31,  1921,  rediscount  for  any  member  bank,  whether 
State  or  National,  notes,  drafts,  and  bills  bearing  the  signa- 
ture or  indorsement  of  any  one  borrower  in  an  amount  not 
to  exceed  twenty  per  cent,  of  the  member  bank's  capital  and 
surplus,  provided  that  the  excess  over  and  above  ten  per  cent, 
be  secured  by  not  less  than  a  like  face  amount  of  bonds  or 
notes  of  the  United  States  issued  since  April  24,  1917,  for 
which  the  borrower  shall  in  good  faith  prior  to  January  1, 
1921,  have  paid,  or  agreed  to  pay,  not  less  than  the  full  face 
amount  thereof,  or  certificates  of  indebtedness  of  the  United 
States.    (As  amended  in  effect  by  Act  of  February  27,  1921.) 

fUnder  the  terms  of  Section  11  (m)  as  amended  by 
the  Act  of  February  27,  1921,  a  Federal  reserve  bank  may, 
until  October  31,  1921,  rediscount  for  a  member  State  bank 
or  trust  company  paper  of  any  one  borrower  secured  by  not  less 
than  a  like  face  amount  of  bonds  or  notes  of  the  United  States 
issued  since  April  24,  1917,  for  which  the  borrower  shall  in  good 
faith  prior  to  January  1,  1921,  have  paid,  or  agreed  to  pay, 
not  less  than  the  full  face  amount  thereof,  or  certificates  of 
indebtedness  of  the  United  States,  even  though  such  State 
bank  or  trust  company  may  already  have  loaned  to  the  bor- 
rower under  his  regular  line  of  credit  in  excess  of  the  ten 
per  cent,  limit  defined  above.  If,  however,  the  member  State 
bank  or  trust  company  has  loaned  to  one  borrower  in  excess 
of  that  ten  per  cent,  limit  under  his  regular  line  of  credit,  the 
Federal  reserve  bank  cannot  rediscount  for  that  State  bank 
or  trust  company  any  of  the  paper  of  that  borrower  taken 


Rediscounts  75 

bank  or  trust  company,  but  in  determining  the 
amount  of  money  borrowed  from  such  State  bank 
or  trust  company  the  discount  of  bills  of  exchange 
drawn  in  good  faith  against  actually  existing  value 
and  the  discount  of  commercial  or  business  paper 
actually  owned  by  the  person  negotiating  the  same 
shall  not  be  included. 

(Regulation  A,  Series  of  1920,  A,  I.) 

ELIGIBILITY  OF  NOTES,  DRAFTS,  AND  BILLS 
OF  EXCHANGE 

The  Federal  Reserve  Board,  exercising  its  statu- 
tory right  to  define  the  character  of  a  note,  draft, 
or  bill  of  exchange  eligible  for  rediscount  at  a  Fed- 
eral reserve  bank,  has  determined  that — 

(a)  It  must  be  a  note,  draft,  or  bill  of  exchange  Conunerciai 
which  has  been  issued  or  drawni,  or  the  proceeds  of  p^p" 
which  have  been  used  or  are  to  be  used  in  the  first 
instance,  in  producing,   purchasing,   carrying,   or 
marketing  goods*  in  one  or  more  of  the  steps  of 

the  process  of  production,  manufacture,  or  distri- 
bution, or  for  the  purpose  of  carrying  or  trading  in 
bonds  or  notes  of  the  United  States. 

(b)  It  must  not  be  a  note,  draft,  or  bill  of  ex-  Hnance paper 
change  the  proceeds  of  which  have  been  used  or  are  '"^'■8''''* 
to  be  used  for  permanent  or  fixed  investments  of 

any  kind,  such  as  land,  buildings,  or  machinery,  or 
for  any  other  capital  purpose. 

under  that  regular  line  of  credit,  but  may  rediscount  any 
paper  so  secured  by  Government  obligations  of  the  kinds 
specified,  acquired  under  the  conditions  set  forth  above,  up  to 
an  amount  not  in  excess  of  twenty  per  cent,  of  the  capital  and 
surplus  of  such  State  bank  or  trust  company.  (As  amended 
in  effect  by  Act  of  February  27,  1921.) 

*  When  used  in  this  regulation  the  word  "goods"  shall  be 
construed  to  include  goods,  wares,  merchandise,  or  agricul- 
tural products,  including  live  stock. 


76  Commercial     Banking     Practice 

(c)  It  must  not  be  a  note,  draft,  or  bill  of  ex- 
change the  proceeds  of  which  have  been  used  or  are 
to  be  used  for  investments  of  a  purely  speculative 
character  or  for  the  purpose  of  lending  to  some 
other  borrower. 
CoUaieral  W   ^^  ^^Y  ^^  sccurcd  by  the  pledge  of  goods 

security  or  Collateral  of  any  nature,  including  paper,  which 

is  inehgible  for  rediscount,  provided  it  (the  note, 
draft,  or  bill  of  exchange)  is  otherwise  ehgible. 

(Regulation  A,  Series  of  1920,  A,  II.) 

APPLICATIONS   FOR  REDISCOUNT 

Certificate  All  applications   for   the   rediscount   of   notes, 

binT"***'  drafts,  or  bills  of  exchange  must  contain  a  certifi- 

cate of  the  member  bank,  in  form  to  be  prescribed 
by  the  Federal  reserve  bank,  that,  to  the  best  of  its 
knowledge  and  belief,  such  notes,  drafts,  or  bills  of 
exchange  have  been  issued  for  one  or  more  of  the 
purposes  .  .  .  [of  producing,  purchasing,  car- 
rying or  marketing  goods,  or  of  carrying  or  trading 
Member  in  United  States  obhgations],  and,  in  the  case  of  a 

^^  member  State  bank  or  trust  company,  all  appHca- 

tions  must  contain  a  certificate  or  guaranty  to  the 
effect  that  the  borrower  is  not  liable,  and  will  not  be 
permitted  to  become  liable  during  the  time  his  paper 
is  held  by  the  Federal  reserve  bank,  to  such  bank 
or  trust  company  for  borrowed  money  in  an  amount 
greater  than  .  .  .  [ten  per  cent,  of  the  capital 
and  surplus  of  such  bank  or  trust  company]. 
(Regulation  A,  Series  of  1920,  A,  III.) 


Rediscount  of  Promissory  Notes 
DEFINITION  OF  NOTE 

A  promissorj^  note,  within  the  meaning  of  this 
regulation,  is  defined  as  an  unconditional  promise, 
in  ^vriting,  signed  by  the  maker,  to  pay,  in  the 
United  States,  at  a  fixed  or  determinable  future 
time,  a  sum  certain  in  dollars  to  order  or  to  bearer. 

(Regulation  A,  Series  of  1920,  A,  IV.) 

ELIGIBLE  CLASSES  OF  NOTES 
Statutory  Provisions 

Upon  the  indorsement  of  any  of  its  member 
banks,  which  shall  be  deemed  a  waiver  of  demand,  paper 
notice  and  protest  by  such  bank  as  to  its  o\\ti  in- 
dorsement exclusively,  any  Federal  reserve  bank 
may  discount  notes,  drafts,  and  bills  of  exchange 
arising    out    of    actual    commercial    transactions; 
that  is,  notes,  drafts,  and  bills  of  exchange  issued 
or  drawn  for  agricultural,  industrial,  or  commer-  and  commodity 
cial  purposes,  or  the  proceeds  of  wliich  have  been  ^^^ 
used,  or  are  to  be  used,  for  such  purposes,  the 
Federal  Reserve  Board  to  have  the  right  to  deter- 
mine or  define  the  character  of  the  paper  thus  eligi- 
ble for  discount,  within  the  meaning  of  this  Act. 
Nothing  in  this  Act  contained  shall  be  construed  to  paper  based  on 
proliibit  such  notes,  drafts,  and  bills  of  exchange,  JJf'^yonf" 
secured  by  staple  agricultural  products,  or  other 
goods,  wares,  or  merchandise,  from  being  eligible 
for  such  discount;  [or]     .     .     .    notes,  drafts,  or 
bills     .     .     .    issued  or  drawn  for  the  purpose  of 
carrying  or  trading  in    .    .    .    bonds  and  notes  of 
the  Government  of  the  United  States. 

(Federal  Reserve  Act^  Section  13.) 


78 


Commercial     Banking     Practice 


Paper  secured 
by  bonds  of 
War  Finance 
Corporation 


Commercial 
paper 


Collateral 
notes 


Classes  of 
eligible  paper 


The  Federal  reserve  banks  shall  be  authorized 
.  .  .  to  rediscount  eligible  paper  secured  by 
.  .  .  bonds  [of  the  War  Finance  Corporation] 
and  indorsed  by  a  member  bank.  No  discount  or 
rediscount  under  this  section  shall  be  granted  at  a 
less  interest  charge  than  one  per  centum  per  annum 
above  the  prevailing  rates  for  eligible  commercial 
paper  of  corresponding  maturity. 

(War  Finance  Corporation  Act,  Section  13.) 

Regulations  of  Federed  Reserve  Board 

The  Federal  Reserve  Board,  exercising  its  statu- 
tory right  to  define  the  character  of  a  note,  draft, 
or  bill  of  exchange  eligible  for  rediscount  at  a  Fed- 
eral reserve  bank,  has  determined  that — 

It  must  be  a  note,  draft,  or  bill  of  exchange 
which  has  been  issued  or  drawn,  or  the  proceeds  of 
which  have  been  used  or  are  to  be  used  in  the  first 
instance,  in  producing,  purchasing,  carrying,  or 
marketing  goods*  in  one  or  more  of  the  steps  of  the 
process  of  production,  manufacture,  or  distribution, 
or  for  the  purpose  of  carrying  or  trading  in  bonds 
or  notes  of  the  United  States. 

It  may  be  secured  by  the  pledge  of  goods  or  col- 
lateral of  any  nature,  including  paper,  which  is 
ineligible  for  rediscount,  provided  it  (the  note, 
draft,  or  bill  of  exchange)  is  otherwise  eligible. 

(Regulation  A,  Series  of  1920,  A,  II.) 

Opinions  and  Rulings 

There  are  two  general  classes  of  eligible  agricul- 
tural and  commercial  paper — (1)  paper  which  is 
eligible  because  issued  or  drawn  for  an  agricultural 

*  When  used  in  this  regulation  the  word  "goods"  shall  be 
construed  to  include  goods,  wares,  merchandise,  or  agricul- 
tural products,  including  live  stock. 


Rediscounts  79 

DV  commercial  purpose,  and  (2)  paper  which  is  eli- 
gible because  the  proceeds  have  been  or  are  to  be 
ased  for  an  agi'icultural  or  commercial  purpose. 
A  note  of  a  buyer  mven  to  the  seller  in  payment  Commercial 

*  1  •    1      1  1  purpose 

for  articles  purchased  is  a  note  which  has  been 
ssued  or  drawn  for  a  commercial  purpose.  If  a 
lote  is  not  issued  or  drawn  for  such  a  purpose,  its 
eligibility  or  inehgibility  for  rediscount  must  be  de-  Use  of  pro- 
;ermined  by  the  purpose  for  which  the  proceeds  " 
lave  been  or  are  to  be  used.  The  use  of  proceeds  to 
Durchase  goods  for  resale  is  a  commercial  purpose, 
iven  though  the  articles  must  be  considered  perma- 
lent  investments  in  the  hands  of  those  who  ulti- 
nately  purchase  them. 

The  purchase  and  sale  of  any  articles  or  com-  Commercial 
nodities  including  agricultural  products  is  a  com-  paper^*^ 
nercial   rather   than   an   agricultural   transaction.  disti"s»rished 
Consequently,  the  note  of  a  dealer,  whether  it  is 
riven  in  payment  for  articles  or  commodities  pur- 
;hased  for  resale,  or  is  discounted  by  the  dealer  at 
lis  bank  to  provide  funds  with  which  to  purchase 
uch  articles  or  commodities,  can  be  ehgible  for 
•ediscount  onty  as  commercial  paper.     So  also  a 
lote  given  to  a  farmer  in  payment  for  agricultural 
)roducts  gro^^^l  by  him  cannot  be  eligible  for  redis- 
count as  agricultural  paper  but  may  be  eligible  as 
ommercial  paper. 

Whether  the  buyer  makes  his  own  note  or  accepts  Rules  appU- 
,  draft  drawn  on  him  by  a  seller,  the  same  prin-  drafts 
iples  will  apply  in  determining  whether  the  instru- 
aent  representing  the  buyer's  obhgation  is  com- 
lercial  paper  or  agricultural  paper. 

Even  though  a  bill  or  note  may  technically  be  [J^^^J 
hgible  for  rediscount,  a  Federal  reser\^e  bank  is 


80 


Commercial     Banking     Practice 


Loans  to 
individuals 


Discretion  of 
reserve  banks 


Test  of 
eligibility 


Paper  of 

waterworks 

company 


under  no  obligation  to  rediscount  it  but  may  exer- 
cise its  discretionary  power. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1920,  page 
1301;  October,  1921,  page  1199.) 

Federal  reserve  banks  do  not  make  loans  directly 
to  individuals,  but  rediscount  the  paper  of  member 
banks,  which  include  all  national  banks  and  such 
State  banks  as  may  have  joined  the  Federal  Re- 
serv^e  Sj'stem. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1916,  page  272.) 

Even  though  a  note  may  be  technically  ehgible 
for  rediscount,  a  Federal  reserve  bank  may  in  its 
discretion  decline  to  effect  its  rediscount,  if  for  any 
reason  it  is  deemed  to  be  an  undesirable  investment, 
and  should  do  so  in  any  case  where  the  ultimate 
payment  of  the  note  is  dependent  upon  the  success 
of  the  transaction  giving  rise  to  the  note. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1920,  page  699.) 

The  test  of  the  eligibility  of  paper  is  whether  it 
compMes  with  the  terms  of  the  Federal  Reserve  Act 
and  the  Board's  regulations,  and  this  in  turn  in- 
volves the  question  of  the  use  of  the  proceeds.  In 
the  last  analysis  this  is  a  question  of  fact  and  its 
determination  is  the  function  of  the  reserve  banks 
rather  than  of  the  Federal  Reserve  Board. 

(Ruling,  Federal  Reserve  Bulletin,  November,  1920,  page 
1176.) 

The  ninety- day  paper  of  a  waterworks  company, 
the  proceeds  of  which  have  been  or  are  to  be  used  to 
provide  funds  for  payroll,  purchases  of  coal,  etc., 
is  eligible  for  rediscount  by  a  Federal  reserve  bank 
if  the  paper  is  otherwise  in  conformity  with  the  law 
and  the  provisions  of  the  Board's  regulations. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1917,  page  527.) 


Rediscounts  81 


Water  actually  sold  and  delivered  by  an  irriga-  Paperof 

^  irrigation 

company 


tion  company  to  farmers  who  have  contracted  with  "^^'  °" 


the  company  for  its  delivery  may  be  considered 
"goods  sold,"  or  in  other  words,  the  sale  of  water  in 
this  manner  is  a  commercial  transaction.  Conse- 
quentl}%  the  note  of  the  irrigation  company,  the 
proceeds  of  which  have  been  or  are  to  be  used  for 
payroll  or  other  current  purposes  in  connection 
with  the  distribution  of  the  water  to  the  farmers,  is 
eligible  for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1920,  page 
949.) 

If  the  note  of  an  owner  or  producer  is  given  in  Notes  for 
good  faith  to  a  contractor  in  actual  payment  of  ma-  °^*^"*' 
terials  and  services  furnished  bj^  him  for  the  owner 
or  producer,  it  may  be  considered  technically  ehgi- 
ble  for  rediscount  as  paper,  the  proceeds  of  which 
have  been  or  are  to  be  used  for  a  commercial  or  in- 
dustrial purpose.  The  paper  in  the  hands  of  the 
contractor  is  commercial  or  business  paper  actually 
owned  by  him. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1920,  page  699.) 

It  is  impossible  to  make  any  general  ruling  that  Cotton^ 
cotton  factors'  paper,  as  such,  is  ehgible  or  inehgible  ^^p^' 
for  rediscount.  On  the  one  hand,  paper  the  pro- 
ceeds of  which  are  used  to  lend  to  some  third  party 
is  finance  paper  rather  than  commercial  paper  and 
is  in  consequence  ineligible  for  rediscount  even 
though  that  third  party  may  use  the  proceeds  for  a 
commercial  purpose.  On  the  other  hand,  any  paper 
the  proceeds  of  which  are  used  to  purchase  goods  to 
sell  to  some  third  party  is  ehgible  for  rediscount  as 
commercial  paper.  "^' 

Whether  or  not  a  given  transaction  falls  within 
one  class  or  the  other  is  solely  a  question  of  fact 


82 


Commercial     Banking     Practice 


Notes  owned 
by  cotton 
factors 


Notes  for 

trucks 

purchased 


Discount  of 
renewal  notes 


for  the  determination  of  the  directors  of  the  Fed- 
eral reserve  bank  to  which  the  paper  is  presented 
for  rediscount.  The  mere  fact  that  a  borrower  on  a 
given  note  is  a  cotton  factor  does  not  of  itself  render 
that  note  ineligible  since  its  eligibility  is  a  matter  to 
be  determined  by  the  use  to  which  the  proceeds  of 
that  particular  note  are  put. 

(Ruling,  Federal  Reserve  Bulletin,  November,  1919,  page 
1054.) 

If  a  cotton  factor's  loans  to  customers  are  evi- 
denced by  the  customers'  notes,  these  notes  could  be 
indorsed  and  discounted  by  the  factor  and  might 
then  be  ehgible  for  rediscount  upon  satisfactory 
evidence  that  the  proceeds  of  the  loans  have  been 
or  are  to  be  used  for  agricultural  or  commercial 
purposes.  Moreover,  when  a  factor  sells  cotton  on 
credit  terms  which  are  customary  and  which  are 
not  unnecessarily  or  unreasonably  long,  a  note  or 
accepted  draft  for  the  amount  of  the  purchaser's 
obligation  will  have  been  issued  or  drawn  for  a  com- 
mercial purpose  and  may  be  eligible  for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  November,  1920,  page 
1176.) 

A  note  given  by  a  corporation  furnishing  motor 
transportation  to  the  seller  in  payment  for  motor 
trucks  purchased  is  commercial  paper  in  the  hands 
of  the  seller  and  may  therefore  be  eligible  for  redis- 
count after  it  has  been  discounted  by  the  seller. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1921,  page 
191.) 

Renewals  differ,  and  banking  judgment  deter- 
mines the  merits  of  each  particular  case.  Self- 
liquidating  paper,  even  though  the  transaction 
which  gives  rise  to  it  does  not  liquidate  itself  within 
the  ninety-day  maturity,  might  be  discounted  even 


Rediscounts  88 

though  it  appears  to  be  renewal  paper.  Banks 
should  not  enter  into  an  agreement  for  a  renewal. 
Care  should  be  exercised  in  examining  such  paper 
and  the  transactions  which  give  rise  to  it,  but 
mechanical  rules  should  not  be  allowed  to  take  the 
place  of  discriminating  banking  judgment. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1915,  page  74.) 

Paper  of  equity  exchanges,  if  first  discounted  by  Paper  ®^ 
■a  member  bank,  would  be  in  form  eligible  for  redis-  change 
count  at  the  Federal  reserve  bank,  provided  its 
maturity  at  the  time  of  discount  does  not  exceed 
ninety  days.  Their  paper  must,  however,  first  have 
been  discounted  with  a  member  bank  and  the  mem- 
ber bank  alone  would  have  the  right  to  rediscount 
this  paper  with  the  Federal  reserve  bank. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1917,  page  379.) 

The  notes  of  customers  of  a  cold  storage  com-  Notes 
ipany   representing   loans   made   to   them   by   the  J^ou 
company  might  be  eligible  for  rediscount  if  the  «'°"se 
customers  have  used  or  are  to  use  the  proceeds  for 
agricultural  or  commercial  purposes. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1921,  page  309.) 

Secured  Notes. 

Section  13  provides  in  part  that  "nothing  in  this  Effect  of 
Act  contained  shall  be  construed  to  prohibit  such  '®*^""*y 
"^  notes,  drafts,  and  bills  of  exchange,  secured  by 
staple  agricultural  products,  or  other  goods,  wares, 
or  merchandise  from  being  eligible  for  such  dis- 
count." This  provision  is  merely  a  declaration  that 
paper  which  is  eligible  for  rediscount  by  reason  of 
the  use  of  the  proceeds  is  not  made  ineligible  by 
reason  of  being  secured.  The  provision  cannot  be 
construed  to  make  eligible  for  rediscount  paper 
which  is  secured  in  the  manner  specified  but  which 


84 


Commercial     Banking     Practice 


Eligibility  tested  by 
use  of  funds 


is  not  eligible  commercial  or  agricultural  paper  as 
defined  in  the  preceding  part  of  the  section. 

(Ruling,  Federal  Reserve  Bulletin,  November,  1920,  page 
1177.) 

Under  section  13  of  the  Federal  Reserv^e  Act  the 
eligibility  of  a  note  for  rediscount  is  determined  by 
the  use  of  the  funds  derived  from  the  original  nego- 
tiation of  the  note.  The  collateral  security  of  the 
note  may  indicate  its  use,  but  the  form  of  collateral 
is  otherwise  immaterial.  In  other  words,  a  note 
might  be  secured  by  railroad  stocks  and  bonds,  but 
the  proceeds  might  be  used  for  an  agricultural, 
industrial,  or  a  commercial  purpose,  in  which  event 
the  note  would  be  eligible  for  rediscount,  although 
it  would  not  be  if  the  proceeds  were  used  to  pur- 
chase or  carry  the  railroad  stocks  and  bonds. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1917,  page  954.) 


Collateral  notes  for 
commercial  purposes 


Eligible  security  not 
sufficient 


Notes  secured  by  collateral,  the  proceeds  of 
which  have  been  used  or  are  to  be  used  for  commer- 
cial purposes,  and  which  otherwise  comply  with  the 
regulations,  are  eligible  for  rediscount. 

The  fact  that  commercial  paper  has  the  addi- 
tional security  of  collateral  in  no  way  aifects  its 
eligibility  for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1915,  page 
268.) 

A  note,  even  though  secured  by  eligible  paper,  is 
not  itself  ehgible  for  rediscount  unless  issued  for  an 
agricultural,  commercial,  or  industrial  purpose. 

(Ruling,  Federal  Reserve  Bvdletin,  September,  1917,  page 
690.) 


Rediscounts  86 

The  note  of  a  manufacturer  secured  by  his  bills  Collateral  of  bills 
receivable  is  desirable  paper,  and  should  certainly 
not  be  debarred  as  a  collateral  trust  note. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1915,  page  127.) 

A  note,  draft,  or  bill  of  exchange  drawn  for  com-  Collateral  of 
"mercial  purposes  and  otherwise  eligible  for  redis-  ""'*8ages 
count  under  the  provisions  of  section  13  of  the 
Federal   Reserve   Act   is   not   rendered   ineligible 
merely  because  it  is  secured  by  a  mortgage  on  real 
estate. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  June,  1917, 
page  458.) 

Paper  secured  by  staple  perishable  food  products  Notes 
such  as  butter,  cheese,  eggs,  poultry,  frozen  fish,  by  food 
etc.,  carried  for  seasonable  periods  in  cold  storage  ^^°  "'^^ 
on  negotiable  warehouse  receipts,  is  eligible,  if  of- 
fered with  the  indorsement  of  a  member  bank  at  the 
usual  rate  for  ninety-day  commercial  paper. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1918,  page  30.) 

I     A  member  bank  making  loans  against  warehouse  Potatoes 
"receipts  for  potatoes  properly  insured  could  redis-  "cunty 
count  such  paper  with  its  Federal  reserve  bank  for 
j  periods  not  longer  than  ninety  days. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1917,  page  614.) 

The  note  of  a  furnace  company  secured  by  pig  Pig  iron 
iron  manufactured  by  the  company  on  contract  for  '^"^""^^ 
delivery  is  eligible  for  rediscount.    While  this  prin- 
ciple generally  holds  good,  each  case  should  be  care- 
fully scrutinized  that  the  collateral  may  be  readily 
marketable  goods. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1915,  page  127.) 

The  Board  upholds  a  Federal  reserve  bank  in  forili'sou" 
declining  to  give  assurance  to  the  receiver  of  an  ''en*'>ank 
insolvent  member  bank  that  the  Federal  reserve  reopened 


86 


Commercial     Banking     Practice 


Conditions  of 
eligibility 


bank  will  upon  the  reopening  of  the  insolvent  bank 
rediscount  ehgible  paper  freely,  without  requiring 
the  indorsement  of  directors  or  other  additional 
security.  Offerings  should  be  considered  upon  their 
merits. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1916,  page 
66.) 

Notes  Based  on  United  States  Obligations. 

Any  member  bank  which  has  loaned  money  to 
any  of  its  customers  for  the  purpose  of  carrying  or 
trading  in  bonds  or  notes  of  the  United  States  may 
rediscount  with  its  Federal  reserve  bank  the  bill 
or  note  of  its  customer,  provided  such  bill  or  note 

(a)  Has  a  maturity  at  the  time  of  discount  of 
not  more  than  ninety  days,  exclusive  of  days 
of  grace;  and 

(b)  Has  the  indorsement  of  the  member  bank. 
Such  bill  or  note,  however,  need  not  necessarily 

be  secured  and  need  not  be  drawn  for  a  commercial 
purpose  other  than  for  the  purpose  of  carrying  or 
trading  in  notes  or  bonds  of  the  United  States. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1917,  page  158.) 

f'^r^-biiit"  "'"*'*"'  ^  member  bank  acting  through  another  member 

bank  may  obtain  the  discount  of  its  paper  secured 
by  Government  bonds  for  a  period  as  long  as  ninety 
days,  although  a  member  bank  acting  alone  may 
not  tender  its  collateral  note  to  the  Federal  reserve 
bank,  which  runs  for  more  than  fifteen  daj^s. 

It  may  be  proper  in  this  connection  to  consider 
questions  of  fact ;  but  in  case  a  country  bank  which 
has  regular  dealings  with  a  large  bank  in  a  city 
sends  its  note  secured  by  Government  bonds  to  that 
bank,  the  Board  would  regard  the  note  as  ehgible 
for  rediscount  by  the  city  bank.  1 

(Ruling,  Federal  Reserve  Bulletin,  September,  1918,  page 
863.) 


Rediscounts  87 

If  the  proceeds  of  a  note  have  been  used  or  are  to  Notes  of  non- 
be  used  to  carry  or  trade  in  United  States  obliga-  member  banks 
tions,  the  note,  if  acquired  in  good  faith,  should  be 
eligible  for  rediscount  with  the  indorsement  of  the 
member  bank,  whether  it  is  executed  by  a  member 
or  by  a  nonmember  bank. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1918,  page  743.) 

INELIGIBLE  CLASSES  OF  NOTES 
Statutory  Provisions 

The  Federal  Reserve  Board  ....  [shall]  have  Security 
the  right  to  determine  or  define  the  character  of  the  '^^^" 
paper  thus  eligible  for  discount,  within  the  meaning 
of  this  Act  ....  but  such  definition  shall  not 
include  notes,  drafts,  or  bills  covering  merely  in- 
vestments or  issued  or  drawn  for  the  purpose  of 
i  carrying  or  trading  in  stocks,  bonds,  or  other  invest- 
ment securities,  except  bonds  and  notes  of  the  Gov- 
ernment of  the  United  States. 

(Federal  Reserve  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Board 

The  paper  must  not  be  a  note,  draft,  or  bill  of  Notes  for 
exchange  the  proceeds  of  which  have  been  used  or  ^^^ 

~  ^  ^  investments 

are  to  be  used  for  permanent  or  fixed  investments 
of  any  kind,  such  as  land,  buildings,  or  machinery, 
or  for  any  other  capital  purpose. 

The  paper  must  not  be  a  note,  draft,  or  bill  of  Speculative 
exchange  the  proceeds  of  which  have  been  used  or 
are  to  be  used  for  investments  of  a  purely  specula- 
tive character  or  for  the  purpose  of  lending  to  some 
other  borrower. 

(Regulation  A,  Series  of  1920,  A,  II.) 

Opinions  and  Rulings 

Renewals  differ,  and  banking  judgment  deter-  J^ngJJ^*"' 
mines  the  merits  of  each  particular  case.     Those  notes 


or  finance 
paper 


88 


Commercial     Banking     Practice 


Interested 
maker  or 
indorser 


Notes  to 
replace 
funds 
withdrawn 


Paper 
secured  by 
war  savings 
stamps 


Notes  of 

land 

banks 


providing  working  capital  or  to  finance  fixed  in- 
vestments are  not  eligible  for  rediscount.  Banks 
should  not  enter  into  an  agreement  for  a  renewal. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1915,  page  74.) 
Finance  Paper. 

A  note  is  not  eligible  as  commercial  paper  unless 
made  or  indorsed  by  a  party  to  the  commercial 
transaction  out  of  which  it  arises. 

(Federal  Reserve  Bulletin,  September,  1921,  page  1079.) 

A  note  executed  by  bank  "A,"  and  discounted 
by  bank  "B,"  the  proceeds  of  Avhich  were  used  to 
replace  funds  withdrawn  by  customers  to  purchase 
Liberty  bonds,  is  not  eligible  for  rediscount  by  a 
Federal  reserve  bank,  since  the  proceeds  were  not 
used  for  an  agricultural,  industrial,  or  commercial 
purpose,  or  for  the  purchase  of  notes  or  bonds  of 
the  United  States. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1917,  page  954.) 

Notes,  drafts,  and  biUs  of  exchange  which  are 
secured  by  war  savings  stamps  and  the  proceeds  of 
which  were  used  to  purchase  or  carry  war  savings 
stamps  are  ineligible  for  rediscount  with  a  Federal 
reserve  bank. 

War  savings  stamps  are  in  effect  receipts  for 
payment  on  account  of  nonnegotiable  evidences  of 
indebtedness  (war  savings  certificates),  and  could 
not  be  classified  as  bonds  or  notes  of  the  United 
States. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  July,  1918, 
page  637.) 

The  Federal  Reserve  Board  has  heretofore  ruled 
that  collateral  notes  of  a  Federal  land  bank  secured 
by  farm  loan  bonds  are  not  eligible  for  rediscount 


I 


I 


I 


Rediscounts  89 

'^y  a  Federal  reserve  bank.  Joint  stock  land  banks 
ire  organized  for  the  purpose  of  engaging  in  the 
business  of  lending  on  farm  mortgage  securities 
md  issuing  farm  loan  bonds.  Their  business  is 
iherefore  clearly  a  finance  business,  and  paper  is- 
sued by  them  for  the  purpose  of  procuring  funds 
:o  lend  for  agricultural  uses  is  necessarily  finance 
paper  and  not  commercial,  industrial,  or  agricul- 
:ural  paper  within  the  meaning  of  section  13  of  the 
Federal  Reserve  Act,  even  though  the  ultimate 
borrower  may  use  the  proceeds  for  one  of  the  pur- 
poses specified  in  the  law. 

(Ruling,  Federal  Reserve  Bulletin^  June,  1920,  page  609.) 

The  note  of  an  acceptance  house  or  broker,  se-  Notes  of 
3ured  by  acceptances  eligible  for  rediscount  at  a  hoiwes^" 
Federal  reserve  bank,  is  not  eligible  for  rediscount.  '>™ker8 

The  note  of  the  acceptance  house  or  broker  can 
not  be  said  to  have  been  used  for  an  industrial, 
agricultural,  or  commercial  purpose,  since  the  busi- 
ness of  such  acceptance  house  or  broker  is  not  such 
as  to  come  within  any  of  these  classifications.  The 
fact  that  the  note  is  secured  by  eligible  paper  is  im- 
material if  the  proceeds  are  not  used  for  one  of  the 
purposes  named. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1918,  page 
108.) 


The  note  of  a  finance  or  credit  company  which  Notes  of 

finance 
companies 


lis  drawn  either  directly  or  indirectly  to  finance     "*" 


some  industrial  or  commercial  concern  in  the  trans- 
action of  its  business  is  not  ehgible  for  rediscount, 
even  though  it  may  be  secured  by  paper  which  is 
itself  eligible  for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1918,  page  197.) 


90  Commercial     Banking     Practice 

Collateral  The  Board  holds  that  collateral  trust  notes  of  so- 

^j^'  called  finance  companies  should  not  be  accepted  by- 

Federal   reserve    banks    for   rediscount.      Such   a 
transaction  is  not  a  commercial  one. 

(Rilling,  Federal  Reserve  Bulletin,  June,  1915,  page  72.) 


I 


Loans  to  The  words  "in  the  first  instance"  were  inserted 

parties  in  Regulation  A,  Series  of  1920,  A,  II,  for  the  ex- 

press purpose  of  making  it  clear  that  the  making 
of  loans  to  third  parties  is  a  finance  rather  than  a 
commercial  or  agricultural  purpose,  even  though  it 
appears  that  the  third  parties  are  to  use  the  funds 
for  commercial  or  agricultural  purposes. 
Cotton  A  note  of  a  cotton  factor,  the  proceeds  of  which 

paper*  ^^c  loancd  to  his  customers,  is  ineligible  for  redis- 

count even  though  the  loan  is  merely  incidental  to 
the  main  business  of  the  factor.  The  test  of  eli- 
gibility is  not  the  character  of  the  business  of  the 
borrower  but  the  use  of  the  proceeds  of  the  particu- 
lar instrument. 

(Ruling,  Federal  Reserve  Bulletin,  November,   1920,  page 
1176.) 

Notes  Notes  of  a  cold  storage  company  would  be  in- 

ofcold  T     -1  1      -^     1  1  111  1 

storage  eligible  11  the  proceeds  are  to  be  used  by  the  com- 

company  pauy  to  make  loans  to  its  customers  even  though 

such  notes  are  secured  by  the  eligible  notes  of  the 

company's  customers. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1921,  page  309.) 

Collateral  Tlic  uotc  of  a  manufacturer  secured  by  his  bills 

Receivable  receivable  and  issued  for  the  purpose  of  carrying 

collateral  for  a  speculative  purpose  or  collateral  in 
the  nature  of  stocks  and  bonds  other  than  the  securi- 
ties of  the  United  States,  would  not  be  eligible  for 
rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1915,  page  127.) 


Rediscounts  91 

Fixed  Investments. 

The  motor  trucks  of  a  corporation  furnishing  Motor 
motor  transportation  constitute  permanent  or  fixed  *™*** 
investments.     Consequently,  the  notes  of  such  a 
corporation  issued  for  the  purpose  of  providing 
funds  to  purchase  motor  trucks  are  ineligible  for 
rediscount. 

I  A  note  given  by  such  a  corporation  to  the  seller 
in  payment  for  motor  trucks  purchased  is  commer- 
cial paper  in  the  hands  of  the  seller  and  may  there- 
fore be  ehgible  for  rediscount  after  it  has  been  dis- 
counted by  the  seller. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1921,  page 
191.) 

The  note  of  the  owner  of  property  which  is  to  be  Development 
developed  or  built  upon,  the  proceeds  of  which  note  **'  p">p«rty 
have  been  or  are  to  be  used  bj^  him  to  pay  for  the 
work  of  developing  or  building,  is  generally  a  note 
"the  proceeds  of  which  have  been  or  are  to  be  used 
for  permanent  or  fixed  investment"  ^vithin  the 
meaning  of  the  Board's  regulation,  and  therefore 
such  a  note  is  not  eligible  for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1920,  page  699.) 
Nonnegotiable  Paper. 

A  bill  made  payable  with  "collection  charges"  is  Exchange  and 
not  a  negotiable  instrument,  though  the  Negotiable  charges 
Instruments  Law  provides  that  an  instrument  pay-  d'»ting»ri«J>ed 
able  "with  exchange"  does  not  lose  its  negotiability. 

Counsel  suggests  that  the  amount  of  exchange  is 
usually  ascertainable  in  advance  while  collection 
charges  are  not  so  ascertainable. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  November, 
1917,  page  880.) 


92 


Commercial     Banking     Practice 


Charges  be- 
fore and 
after 
maturity 


Asslgiunent 
of  open 
accounts 
ineligible 


While  a  bill  containing  a  provision  for  payment 
of  the  costs  of  collection  and  attornej^'s  fees,  if  it  is 
dishonored  at  maturity,  is  a  valid  negotiable  instru- 
ment, a  bill  drawn  for  a  fixed  sum  "with  collection 
charges"  is  not  a  negotiable  instrimient  unless  it  is 
so  drawn  as  to  show  that  no  collection  charges  are 
to  be  included  unless  the  bill  is  dishonored  at 
maturity. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  August, 
1918,  page  745.) 

The  assignment  of  an  open  account  is  not  nego- 
tiable paper  and  is  not  eligible  for  rediscount  by  a 
Federal  reserve  bank  under  the  terms  of  section  13 
of  the  Federal  Reserve  Act. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  May,  1916, 
page  227.) 


Evidence 
of  eligi- 
bility 


Statement 
required 


EVIDENCE  OF  ELIGIBILITY 
Regulations  of  Federal  Reserve  Boeurd  ■ 

A  Federal  reserve  bank  must  be  satisfied  by  ref- 
erence to  the  note  or  otherwise  that  it  is  eligible 
for  rediscount.  The  member  bank  shall  certify  in 
its  application  whether  the  note  offered  for  redis- 
count has  been  discounted  for  a  depositor  other 
than  a  bank  or  for  a  nondepositor  and,  if  discounted 
for  a  bank,  whether  for  a  member  or  a  nonmember 
bank.  The  member  bank  must  also  certify  whether 
a  financial  statement  of  the  borrower  is  on  file 
with  it. 

A  recent  financial  statement  of  the  borrower  must 
be  on  file  with  the  member  bank  in  all  cases,  except 
with  respect  to  any  note  discounted  by  a  member 
bank  for  a  depositor  other  than  a  bank  or  another 
member  bank  if — 


Rediscounts  9S 

(1)  It  is  secured  by  a  warehouse,  terminal,  or  Exceptions 
other  similar  receipt  covering  goods  in  storage,  or 
by  bonds  or  notes  of  the  United  States ;  or 
i  (2)  The  aggregate  of  obHgations  of  the  bor- 
•  rower  rediscounted  and  offered  for  rediscount  at 
the  Federal  reserve  bank  by  the  member  bank  is 
less  than  a  sum  equal  to  ten  per  cent,  of  the  paid-in 
capital  of  the  member  bank  and  is  less  than  $5,000. 
The  Federal  reserve  bank  shall  use  its  discretion 
in  taking  the  steps  necessary  to  satisfy  itself  as  to 
eligibility.  Compliance  of  the  note  .  .  .  [mth  the 
requirement  that  its  proceeds  must  not  have  been 
used  or  be  used  for  permanent  or  fixed  investments 
or  for  any  other  capital  purpose]  may  be  evidenced 
by  a  statement  of  the  borrower  showing  a  reason- 
able excess  of  quick  assets  over  current  HabiHties. 
A  Federal  reserve  bank  may,  in  all  cases,  require 
the  financial  statement  of  the  borrower  to  be  filed 
with  it. 

(Regulation  A,  Series  of  1920,  A,  IV.) 

Opinions  and  Rulings 

'       Federal  reserve  banks  are  authorized  to  discount  Cotton-mUi 
cotton-mill  paper  indorsed  by  member  banks  where  ^^^^^ 

I  general  conditions  are  satisfactory  and  statement  of 
cotton  mill  shows  that  plant  is  not  mortgaged  and 
that  the  deficiency  between  capital  and  plant  ac- 
count does  not  amount  to  more  than  $5  per  spindle. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1915,  page  73.) 

It  is  not  the  present  pohcy  of  the  Federal  Re-  ^^.^°^ 
serv'e  Board  to  lay  down  definite  tests  for  deter-  asseuio 
mining  whether  paper  which  is  eligible  for  discount  Ji^j^^Jfej 
as  a  matter  of  law  should  be  considered  acceptable 
for  rediscount  from  a  credit  standpoint.     The  test 
prescribed  in  the  ruhng  [pubHshed  on  page  73  of 


94 


Commercial     Banking     Practick 


Standing 
dmber 


Unmlned 
minerals 


Commercial 
paper 


the  Federal  Reserve  Bulletin  for  June,  1915]  for 
determining  the  acceptability  of  paper  of  the  char- 
acter referred  to  should  not  therefore  be  regarded 
as  binding  on  Federal  reserve  banks. 

A  Federal  reserve  bank  may,  if  it  so  desires,  re- 
discount a  note  made  by  a  borrower  whose  state- 
ment fails  to  show  an  excess  of  quick  assets  over 
current  HabiUties.  Such  a  statement  is  not  the  only 
evidence  by  wliich  a  Federal  reserve  bank  may  sat- 
isfy itself  that  the  proceeds  of  a  note  have  not  been 
used  and  are  not  to  be  used  for  permanent  or  fixed 
investments.  It  is  a  question  of  policy  to  be  deter- 
mined by  the  Federal  reserve  bank  in  each  case 
whether  that  bank  will  rediscount  a  particular  note 
offered  to  it  in  spite  of  the  fact  that  the  borrower's 
statement  fails  to  show  a  reasonable  excess  of  quick 
assets  over  current  liabihties. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1921,  page  546.) 

The  Board  does  not  regard  it  as  safe  policy  for 
Federal  reserve  banks  to  treat  timber  standing 
upon  tracts  of  land  as  quick  assets,  similar  to  man- 
ufactured goods  in  the  hands  of  the  manufacturer 
or  jobber. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1915,  page  126.) 

Unmined  minerals  are  not  regarded  as  quick 
assets. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1915,  page  126.) 

MATURITY 

Statutory  Provisions 

Notes,  drafts,  and  bills  admitted  to  discount  un- 
der the  terms  of  this  paragraph  must  have  a  matu- 
rity at  the  time  of  discount  of  not  more  than  ninety 
days,  exclusive  of  days  of  grace:  Provided,  That 
notes,  drafts,  and  bills  drawn  or  issued  for  agri- 


paper 


i 


Rediscounts  05 

cultural  purposes  or  based  on  live  stock  and  having  Apkuiturai 
a.  maturity  not  exceeding  six  months,  exclusive  of  "il^r*  *''"^'' 
days  of  grace,  may  be  discounted  in  an  amount  to 
be  limited  to  a  percentage  of  the  assets  of  the 
Federal  reserve  bank,  to  be  ascertained  and  fixed 
by  the  Federal  Reserve  Board. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

A  bill  payable  "on  or  before"  a  certain  date  is  Notes  payable^ 
negotiable  paper  and,  if  otherwise  in  conformity 
with  the  provisions  of  law  and  of  the  Federal  Re- 
serve Act,  is  eligible  for  discount  by  a  Federal  re- 
serve bank. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1916,  page  394.) 

i     A  demand  note  or  bill  is  not  eligible  under  the  Demand  notes 
provisions  of  the  Act,  since  it  is  not  in  terms  pay- 
lable  within  the  prescribed  ninety  days,  but  may,  at 
the  option  of  the  holder,  not  be  presented  for  pay- 
ment until  after  that  time. 

If  the  bill  were  altered  so  as  to  read  "on  or  be- 
fore    days  from  date,  pay  to  the  order  of 

ourselves,"  etc.,  it  would  come  within  the  terms  of 
the  law  and  would  be  eligible  for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1917,  page  378.) 

A  note  made  payable  "on  demand,  and  if  no  de-  Notes  payable  before 

mand  is  made,  then  on ,"  is  eligible  for 

rediscount  by  a  Federal  reserve  bank,  provided 
that  the  date  to  be  filled  in  is  not  more  than  ninety 
days  from  the  date  of  discount,  and  provided  further 
it  conforms  to  the  other  provisions  of  law  and  the 
regulations  of  the  Board. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1917,  page  527.) 


96 


Commercial     Banking     Practice 


Extension  of 
tirae 


A  note  or  draft  containing  a  provision  for  an  ex- 
tension of  time  should  not  be  approved  for  general 
use  by  the  Federal  Reserve  Board.  M 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1918,  page  870.) 


Alteration 
of  maturity 
provision 


In  the  opinion  of  this  office  the  holder  of  a  note 
which  contains  a  provision  for  its  extension  from 
time  to  time  without  notice  has  no  right  to  strike 
out  this  provision  or  to  effect  any  alteration  in  a 
negotiable  note  after  it  has  been  discounted,  and  to 
do  so  might  have  the  effect  of  releasing  some  of  the 
parties  to  the  note. 

(Ruling,  Federal  Reserve  Bulletin,  November,  1918,  page 
1118.) 


Direct  loans 
and 

rediscounts 
distinguished 


A  member  bank  acting  through  another  member 
bank  may  obtain  the  discount  of  its  paper  secured 
by  Government  bonds  for  a  period  as  long  as  ninety 
days,  although  a  member  bank  acting  alone  may 
not  tender  its  collateral  note  to  the  Federal  reserve 
bank,  which  runs  for  more  than  fifteen  days. 

It  may  be  proper  in  this  connection  to  consider 
questions  of  fact — whether  the  transaction  is  in 
good  faith  or  whether  the  two  banks  exchange  cour- 
tesies merely  for  the  purpose  of  having  their  notes 
discounted  for  ninety  days  instead  of  fifteen  days; 
but  in  case  a  country  bank  which  has  regular  deal- 
ings with  a  large  bank  in  a  city  sends  its  note  se- 
cured by  Government  bonds  to  that  bank,  the  Board 
would  regard  the  note  as  eligible  for  rediscount  by 
the  city  bank. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1918,  page 
863.) 


Rediscounts  97 

AMOUNT  OF  PAPER  OF  ONE  INTEREST  REDIS- 
COUNTABLE  FOR  ONE  MEMBER  BANK 

Statutory  Provisions 

The  aggregate  of  such  notes,  drafts,  and  bills  Ten  per  cent 
bearing  the  signature  or  indorsement  of  any  one  ''""* 
borrower,  whether  a  person,  company,  firm,  or  cor- 
poration, rediscounted  for  any  one  bank  shall  at  no 
•time  exceed  ten  per  centum  of  the  unimpaired  capi-     "''*'°" 
tal  and  surplus  of  said  bank;  but  this  restriction 
shall  not  apply  to  the  discount  of  bills  of  exchange 
drawn    in    good    faith    against    actually    existing 
values. 

(Federal  Reserve  Act,  Section  13.) 


No  Federal  reserve  bank  shall  be  permitted  to  Rediscounu 
discount  for  any  [member]  State  bank  or  trust  staulSi 
company  notes,  drafts,  or  bills  of  exchange  of  any 
one  borrower  who  is  liable  for  borrowed  money  to 
such  State  bank  or  trust  company  in  an  amount 
greater  than  ten  per  centum  of  the  capital  and  sur- 
plus of  such  State  bank  or  trust  company,  but  the 
discount  of  bills  of  exchange  drawn  against  actually 
existing  value  and  the  discount  of  commercial  or 
business  paper  actually  owned  by  the  person  nego-  conditions 
tiating  the  same  shall  not  be  considered  as  borrowed 
money  within  the  meaning  of  this  section.  The 
Federal  reserve  bank,  as  a  condition  of  the  discount 
of  notes,  drafts,  and  bills  of  exchange  for  such  State 
bank  or  trust  company,  shall  require  a  certificate 
or  guaranty  to  the  effect  that  the  borrower  is  not 
liable  to  such  bank  in  excess  of  the  amount  provided 
by  this  section,  and  will  not  be  permitted  to  become 
hable  in  excess  of  this  amount  while  such  notes, 
drafts,  or  bills  of  exchange  are  under  discount  with 
the  Federal  reserve  bank. 

(Federal  Reserve  Act,  Section  9.) 


98 


Rediscount 
of  war  paper 
until  October 
31,  1921 


Commercial     Banking     Practice 


I 


Rediscount 
of  war  paper 
for  members 


Upon  the  affirmative  vote  of  not  less  than  five  of 
its  members,  the  Federal  Reserv^e  Board  shall  have 
power  to  permit  Federal  reserve  banks  to  discount 
for  any  member  bank  notes,  drafts,  or  bills  of  ex- 
change bearing  the  signature  or  endorsement  of 
any  one  borrower  in  excess  of  the  amount  permitted 
by  section  9  and  section  13  of  this  Act,  but  in  no 
case  to  exceed  twenty  per  centum  of  the  member 
bank's  capital  and  surplus:  Provided,  however. 
That  all  such  notes,  drafts,  or  bills  of  exchange  dis- 
counted for  any  member  bank  in  excess  of  the 
amount  permitted  under  such  sections  shall  be  se- 
cured by  not  less  than  a  like  face  amount  of  bonds 
or  notes  of  the  United  States  issued  since  April  24, 
1917,  for  which  the  borrower  shall  in  good  faith 
prior  to  January  1, 1921,  have  paid  or  agreed  to  pay 
not  less  than  the  full  face  amount  thereof,  or  certifi- 
cates of  indebtedness  of  the  United  States:  Pro- 
vided, further.  That  the  provisions  of  this  subsec- 
tion (m)  shall  not  be  operative  after  October 
31,  1921. 

(Federal  Reserve  Act,  Section  11  (m).) 

Regulations  of  FederzJ  Reserve  Board 

Under  the  terms  of  section  11  (m)  as  amended 
by  the  Act  of  February  27,  1921,  a  Federal  reserve 
bank  may,  until  October  31,  1921,  rediscount  for 
any  member  bank,  whether  State  or  National, 
notes,  drafts,  and  bills  bearing  the  signature  or  in- 
dorsement of  anj^  one  borrower  in  an  amount  not  to 
exceed  twenty  per  cent,  of  the  member  bank's  capi- 
tal and  surplus,  provided  that  the  excess  over  and 
above  ten  per  cent,  be  secured  by  not  less  than  a  like 
face  amount  of  bonds  or  notes  of  the  United  States 
issued  since  April  24,  1917,  for  which  the  borrower 
shall  in  good  faith  prior  to  January  1,  1921,  have 


Rediscounts  99 

paid  or  agreed  to  pay  not  less  than  the  full  face 
amount  thereof,  or  certificates  of  indebtedness  of 
the  United  States. 

(Regulation  A,  Series  of  1920,  A,  I,  Note,  as  amended  in 
effect  by  Act  of  February  27,  1921.) 

Under  the  terms  of  section  11  (m)  as  amended  Rediscount  of 
by  the  Act  of  February  27,  1921,  a  Federal  reserve  rmbTstat'e 
bank  may,  until  October  31,  1921,  rediscount  for  ^^^ 
a  member  State  bank  or  trust  company  paper  of 
any  one  borrower  secured  by  not  less  than  a  like 
face  amount  of  bonds  or  notes  of  the  United  States 
issued  since  April  24,  1917,  for  which  the  borrower 
shall  in  good  faith  prior  to  January  1,  1921,  have 
paid  or  agreed  to  pay  not  less  than  the  full  face 
amount  thereof,  or  certificates  of  indebtedness  of 
the  United  States,  even  though  such  State  bank  or 
trust  company  may  already  have  loaned  to  the  bor- 
rower under  his  regular  line  of  credit  in  excess  of 
the  ten  per  cent,  limit  defined  above.  If,  however, 
the  member  State  bank  or  trust  company  has  loaned 
to  one  borrower  in  excess  of  that  ten  per  cent,  limit 
under  his  regular  line  of  credit,  the  Federal  reserve 
bank  can  not  rediscount  for  that  State  bank  or  trust 
company  any  of  the  paper  of  that  borrower  taken 
under  that  regular  line  of  credit,  but  may  redis- 
count any  paper  so  secured  by  Government  obliga- 
tions of  the  kinds  specified,  acquired  under  the  con- 
ditions set  forth  above,  up  to  an  amount  not  in 
excess  of  twenty  per  cent,  of  the  capital  and  surplus 
of  such  State  bank  or  trust  company. 

(Regulation  A,  Series  of  1920.  A,  I,  Note,  as  amended  in 
eflFect  by  Act  of  February  27,  1921.) 

Opinions  and  Rulings 

If  any  particular  paper  presented  bv  a  member  Paper  of  one 

*'^  IT    r         r  .'_  maker  or 

bank  to   a   Federal   reserve   bank   for  rediscount,  indorser 


100 


Discretion 
of  reserve 
bank 


Not  applicable 
to  rediscoiuiting 
bank 


Paper  of 

cotton 

broker 


Commercial     Banking     Practice 

singly  or  added  to  the  paper  of  the  same  makers 
or  indorsers  which  the  Federal  reserve  bank  has  al- 
ready discounted  for  said  member  bank,  amounts  to 
a  total  of  more  than  ten  per  cent,  of  the  unimpaired 
capital  and  surplus  of  that  bank,  the  Federal  re- 
serve bank  has  no  authority  for  such  rediscount. 
(Ruling,  Federal  Reserve  Bulletin,  May,  1916,  page  224.) 

A  Federal  reserve  bank  may  properly  decline  to 
discount  for  a  member  bank  the  paper  of  any  one 
borrower  on  the  ground  that  the  Federal  reserve 
bank  has  theretofore  discounted  for  other  member 
banks  what  it  deems  to  be  a  sufficient  amount  of 
that  particular  borrower's  paper. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1920,  page  276.) 

In  the  opinion  of  the  Board  the  limitations  con- 
tained in  section  13  of  the  Federal  Reserve  Act  on 
the  rediscount  of  paper  bearing  the  signature  or 
indorsement  of  any  one  borrower  should  not  be  held 
to  refer  to  the  indorsement  of  a  nonmember  bank 
on  paper  rediscounted  with  a  member  bank. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1918,  page  520.) 

A  cotton  broker  who  is  a  depositor  of  a  bank 
finances  cotton  for  various  mills  by  giving  to  the 
bank  his  note  secured  by  warehouse  receipts  of  the 
mills  indorsed  in  blank,  for  cotton  stored  in  his 
name  and  properly  insured,  but  sold  to  the  mill  for 
a  specific  amount  to  be  paid  at  a  specific  time,  as 
per  sales  note  attached.  The  question  arises 
whether  such  loans  taken  from  one  broker  in  excess 
of  ten  per  cent,  of  the  capital  and  surplus  of  the 
bank  w^ould  be  an  excess  loan  under  the  Federal 
Reserve  Act,  if  the  financing  for  each  individual 
mill  and  the  accepted  sales  note  held  of  said  mill 
were  not  in  excess  of  said  ten  per  cent. 


I 


Rediscounts  .    '■ ;  :  JO-Jl 

It  is  held  that  the  transaction  in  form  is  merely 
a  discount  of  single  name  negotiable  paper  secured 
by  so  many  bales  of  cotton.  No  Federal  reserve 
bank  could  rediscount  such  notes  bearing  the  name 
of  one  broker  for  an  aggregate  amount  in  excess 
of  ten  per  cent,  of  the  capital  and  surplus  of  the 
member  bank. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1916,  page  113.) 

While  a  member  bank  may  acquire  commercial  or  Commercial 
business  paper  from  the  same  person  in  excess  of  pap**^*"""' 
ten  per  cent,  of  its  unimpaired  capital  and  surplus, 
its  Federal  reserve  bank  can  not  rediscount  such 
paper  bearing  the  signature  or  indorsement  of  the 
same  person  in  excess  of  that  amount. 

Section  13,  Federal  Reserve  Act,  does  not  amend 

section  5200,  United  States  Revised  Statutes.* 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  June,  1916, 
page  274.) 

A  note  or  bill  rediscounted  in  good  faith  by  a  Rediscounted  paper 
member  bank,  which  is  no  longer  owned  or  held  by  ""ctira  szoo*^ 
the  bank,  need  not  be  included  as  a  liabilit}^  of  the 
maker  to  the  bank  within  the  meaning  of  section 
5200,  Revised  Statutes.  Notes  or  bills  rediscounted 
under  an  agreement  to  repurchase,  or  which  are 
merety  credited  to  the  account  of  the  bank  offering 
them  for  rediscount,  are  subject  to  the  limitations 
of  section  5200. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1918,  page  867.) 

Rediscounts  for  Member  State  Banks. 

The  provisions  of  section  9  of  the  Federal  Re-  Total 
serve  Act  limiting  the  amount  of  paper  of  any  one  ^^J'*^ 
borrower  which  may  be  rediscounted  for  a  State  surplus 

*For  section  5200  see  page  64,  above. 


i62 


Commercial     Banking     Practice 


Limitations  of 
sections  9  and 
13  distinguished 


Rediscounted 
paper  not 
limited 


member  bank  to  ten  per  cent,  of  the  capital  and 
surplus  of  that  bank  relate  to  the  total  capital  and 
surplus  of  the  bank  and  not  merely  to  the  capital 
and  surplus  assigned  under  the  terms  of  the  State 
law  to  the  commercial  department  of  the  bank. 

(Opinion  of  Counsel^  Federal  Reserve  Bulletin,  May,  1920, 
page  495.) 

Under  the  terms  of  section  13  no  Federal  reserve 
bank  may  properly  rediscount  for  any  State  mem- 
ber bank  the  paper  of  any  one  borrower  in  excess 
of  ten  per  cent,  of  the  capital  and  surplus  of  that 
member  bank.  Bills  of  exchange  which  are  drawn 
against  actually  existing  values  are  expressly  ex- 
cepted from  this  limitation  but  commercial  or  busi- 
ness paper  must  be  included  within  it. 

Section  9  provides  that  no  Federal  reserve  bank 
may  discount  for  any  State  member  bank  any  of 
the  paper  of  any  one  borrower  who  is  liable  to  such 
bank  for  borrowed  money  in  excess  of  ten  per  cent, 
of  the  capital  and  surplus  of  the  State  bank.  In  deter- 
mining whether  a  customer  is  liable  to  a  State  bank 
in  an  amount  in  excess  of  ten  per  cent.,  neither  bills 
of  exchange  drawn  against  actually  existing  values 
nor  cormnercial  or  business  paper  actually  owned 
by  the  person  negotiating  it  shall  be  considered,  but 
this  provision  cannot  in  any  way  be  construed  to 
authorize  the  Federal  reserve  bank  to  rediscount 
for  a  State  member  bank  in  excess  of  the  limits  pre- 
scribed by  section  13. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1919,  page  1157.) 

Where  a  State  bank,  which  is  a  member  of  the 
Federal  Reserve  System,  has  loaned  to  one  of  its 
customers  an  amount  equal  to  thirty  per  cent,  of  its 
capital   and   surplus,    and   has   rediscounted   two- 


Rediscounts  103 

thirds  of  this  amount  with  a  correspondent  bank, 
the  remaining  one-third  is  eligible  for  rediscount 
with  its  Federal  reserve  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  July,  1918, 
page  638.) 

AGGREGATE  AMOUNT  REDISCOUNTABLE 

FOR  ONE  BANK 

Statutory  Provisions 

No  national  banking  association  shall  at  any  Not  limited 
time  be  indebted,  or  in  any  way  liable,  to  an  amount  ^y  «^<=''<*"  5202 
exceeding  the  amount  of  its  capital  stock  at  such 
time  actually  paid  in  and  remaining  undiminished 
by  losses  or  otherwise,  except  on  account  of  .  .  . 
liabilities  incurred  under  the  provisions  of  the 
Federal  Reserve  Act. 

(Section  5202,  Revised  Statutes,  as  amended.) 

The  discount  and  rediscount  and  the  purchase  Subject  to 
and  sale  by  any  Federal  reserve  bank  of  any  bills  o^F^Jerd 
receivable  and  of  domestic  and  foreign  bills  of  ex-  Reserve  Board 
change,  and  of  acceptances  authorized  by  this  Act, 
shall  be  subject  to   such  restrictions,  limitations, 
and  regulations  as  may  be  imposed  by  the  Federal 
Reserve  Board. 

(Federal  Reserve  Act,  Section  13.) 

Said  board  [of  directors  of  each  Federal  reserve  Duty  of 
bankl   shall  administer  the   affairs  of  said  bank  '^«*'^"j 

.  .....       reserve 

fairly  and  impartially  and  without  discrimination  in  bank 
favor  of  or  against  any  member  bank  or  banks  and 
shall,  subject  to  the  provisions  of  law  and  the  orders 
of  the  Federal  Reserve  Board,  extend  to  each  mem- 
ber bank  such  discounts,  advancements  and  accom- 
modations as  may  be  safely  and  reasonably  made 
with  due  regard  for  the  claims  and  demands  of 
other  member  banks. 

(Federal  Reserve  Act,  Section  4.) 


104 


Not  limited 
bylaw 


Indorsement 


Indorsement 


Without 
recourse 


Procuring  rediscounts 
for  nonmembers 


Commercial     Banking     Practice 

Opinions  and  Rulings 

The  law  places  no  limitation  upon  the  amount  of 
commercial  paper  which  a  member  bank  may  re- 
discount with  a  Federal  reserve  bank,  but  leaves 
this  to  the  judgment  of  the  officers  of  the  Federal 
reserve  bank. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1916,  page 
457.) 

INDORSEMENT  OF  MEMBER  BANKS 
Statutory  Provisions 

Upon  the  indorsement  of  any  of  its  member 
banks,  which  shall  be  deemed  a  waiver  of  demand, 
notice  and  protest  by  such  bank  as  to  its  own  in- 
dorsement exclusively,  any  Federal  resen'^e  bank 
may  discount  notes,  drafts,  and  bills  of  exchange. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

A  simple  written  indorsement  will  be  regarded 
as  satisfactory  and  as  coming  within  the  terms  of 
the  law. 

(Ruling,  Federal  Reserve  Bulletin,  October,  1916,  page 
524.) 

If  a  note  is  otherwise  eligible  for  rediscount,  the 
fact  that  it  bears  a  "without  recourse"  indorsement 
of  a  nonmember  bank  will  not  affect  its  eligibility. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  August, 
1918,  page  745.) 

REDISCOUNT  FOR  NONMEMBER  BANKS 
Statutory  Provisions 

No  member  bank  shall  act  as  the  medium  or 
agent  of  a  nonmember  bank  in  applying  for  or  re- 
ceiving discounts  from  a  Federal  reserve  bank  un- 


I 


I 


Rediscounts  105 

der  the  provisions  of  this  Act,  except  by  permission 
of  the  Federal  Reserve  Board. 
(Federal  Reserve  Act,  Section  19.) 

Opinions  and  Rulings 

Assuming  that  the  paper  offered  by  a  member  Paper 
bank  for  rediscount  is  ehgible  under  the  regulations  noMTmber" 
prescribed  by  the  Board,  it  would  be  necessary  in 
each  case  for  the  officers  of  the  Federal  reserve 
bank  to  determine  whether  or  not  the  proceeds  of 
such  discount  are  to  be  used  for  the  purpose  of  mak- 
ing a  loan  to  a  nonmember  bank.  If  the  money 
thus  borrowed  is  to  be  re-lent  to  a  nonmember 
bank,  rediscount  should  not  be  accepted  without 
the  permission  of  the  Federal  Reserve  Board.  If, 
on  the  other  hand,  a  member  bank  had  in  good 
faith  acquired  from  a  nonmember  bank  by  redis- 
count notes  which  are  ehgible  under  the  regulations 
of  the  Board  for  rediscount  with  the  Federal  re- 
serve bank,  and  such  notes  were  held  as  a  part  of 
the  assets  of  the  member  bank,  there  would  seem  to 
be  no  objection  to  the  Federal  reserve  bank's  ac- 
cepting such  rediscounts,  provided  the  officers  are 
satisfied  that  the  transaction  is  a  bona  fide  trans- 
action and  that  the  member  bank  did  not  extend 
accommodation  to  the  nonmember  bank  with  a 
view  to  rediscounting  notes  so  acquired  with  the 
Federal  reserve  bank. 

Tliis  is  one  of  the  cases  which  must  be  left  very 
largely  to  the  judgment  and  discretion  of  the  Fed- 
eral reserve  bank  officers;  and  a  determination 
must  be  reached  by  them  on  the  facts  of  the  case. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1915,  page  213.) 

The  Federal  Reserve  Board  has  given  general  AppiicaHon 
authority  to  member  banks  to  apply  to  their  respec-  *° «'»"""» 


106  Commercial     Banking     Practice 

tive  Federal  reserve  banks  for  discounts  of  eligible 
paper  acquired  by  such  member  banks  from  non- 
member  banks,  such  authority  to  be  effective  until 
withdrawn  by  the  Federal  Reserve  Board.  The  ex- 
tent to  which  the  respective  Federal  reserve  banks 
will  entertain  such  application  is,  of  course,  a  matter 
of  poHcy  for  the  determination  of  the  officers  of  each 
bank. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1921,  page  963.) 

Paper  In  the  opinion  of  the  Board  the  limitations  con- 

indorsed  by  taiucd  in  scctiou  13  of  the  Federal  Reserve  Act  on 

the  rediscount  of  paper  bearing  the  signature  or  in- 
dorsement of  any  one  borrower  should  not  be  held 
to  refer  to  the  indorsement  of  a  nonmember  bank 
on  paper  rediscounted  with  a  member  bank. 

It  is  true  that  in  such  case  the  nonmember  bank 
is  contingently  liable  if  the  paper  is  not  paid  at  ma- 
turity, but  the  Board  is  incHned  to  the  view  that 
this  language  refers  to  paper  bearing  the  signature 
or  indorsement  of  borrowers  or  customers  of  the 
member  bank  and  not  to  the  indorsement  of  other 
banks.  A  nonmember  bank  could  not,  of  course, 
obtain  indirect  accommodation  from  the  Federal 
reserve  bank  through  the  medium  or  agency  of  a 
member  bank  except  with  the  permission  of  the 
Federal  Reserve  Board,  but  if  a  member  bank  had 
acquired  eligible  paper  in  due  course  by  rediscount 
from  a  nonmember  bank  the  member  bank  should 
hardly  be  precluded  from  rediscounting  this  paper 
with  the  Federal  reserve  bank  because  it  bears  the 
indorsement  of  the  nonmember  bank. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1918,  page  520.) 


Rediscount  of  Drafts  and  Trade 
Acceptances 

DEFINITION  OF  DRAFT  OR  BILL  OF  EXCHANGE 
Regulations  of  Federal  Reserve  Board 

A  draft  or  bill  of  exchange,  within  the  meaning  Draft  or  bin 
of  this  regulation,  is  defined  as  an  unconditional  °  "'^  ^^^ 
order  in  writing,  addressed  by  one  person  to  an- 
other, signed  by  the  person  giving  it,  requiring  the 
person  to  whom  it  is  addressed  to  pay  in  the  United 
States,  at  a  fixed  or  determinable  future  time,  a 
sum  certain  in  dollars  to  the  order  of  a  specified 
person. 

(Regulation  A,  Series  of  1920,  A,  V.) 

Opinions  and  Rulings 

A  note  or  draft  containing  a  provision  for  an  ex-  Extension 

tension  of  time  should  not  be  approved  for  general 

use  by  the  Federal  Reserve  Board. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1918,  page  870.) 

The  drawer  and  indorser  of  a  bill  of  exchange  Presentment 
made  payable  on  a  date  specified  in  the  bill  are  not  "[j'^epuice 
discharged  by  a  failure  to  present  for  acceptance, 
unless  the  bill  expressly  provides  that  it  must  be 
presented  for  that  purpose,  or  unless  it  is  payable 
elsewhere  than  at  the  residence  or  place  of  business 
of  the  drawee. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  November, 
1916,  page  608.) 

The  acceptor  of  a  bill  of  exchange  is  the  prin-  Acceptornot 
cipal  debtor.     The  law  requires  that  notice  of  de-  waiver 
mand  and  protest  be  given  to  parties  secondarily 


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Rediscounts  109 

liable  in  case  of  dishonor.  This  right  to  receive 
notice  is  a  personal  one  which  may  be  waived  by  the 
parties  entitled  thereto,  that  is,  the  drawer  and  in- 
dorser ;  but  such  waiver  has  no  effect  on  the  acceptor 
or  principal  debtor. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1916,  page  277.) 

A  sight  draft  which  is  accepted  by  the  drawee,  Qualified 
payable  at  a  future  date,  is  a  qualified  acceptance  ^"^p**"" 
which  the  holder  may  refuse  to  take,  but  if  such  an 
acceptance  is  taken  by  the  holder,  the  drawer  and 
indorsers  are  released  unless  they  have  either  ex- 
pressly or  impliedly  authorized  the  holder  to  take  a 
quahfied  acceptance  or  unless  they  subsequently 
assent  thereto. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  June,  1919, 
page  566.) 

Negotiability. 

The  negotiability  of  a  bill  of  exchange  is  not  af-  Effect  of 
fected  by  provisions  which  waive  demand,  notice, 
and  protest;   which   waive   homestead   exemption 
rights ;  and  which  provide  for  the  costs  of  collection 
and  attorney's  fees. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  May,  1916, 
page  226.) 

A  provision  in  a  draft  or  bill  of  exchange  that  it  Drafts  payable 
is  payable  "with  interest  at  the  rate  of  —  per  cent.  ^ 
per  annum  after  maturity,  if  payment  is  delayed," 
does  not  affect  the  negotiability  of  the  instrument. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  March,  1917, 
page  200.) 

A  draft  made  "payable  on  arrival  of  car"  is  non-  ^[conEn'^ 
negotiable,  not  being  payable  at  a  determinable 
future  time. 

(Opinion    of   Counsel,   Federal   Reserve   Bulletin,   August, 
1915,  page  219.) 


110 


Commercial     Banking     Practice 


Exchange  and 

collection 

charges 


Charges  before 
and  after  maturity 


Drafts  payable 
to  order  of 
drawee 


Acceptance 
without 
drawer's 
signature 


Inspection 
of  goods 


A  bill  made  payable  with  "collection  charges"  is 
not  a  negotiable  instrument,  though  the  Negotiable 
Instruments  Law  provides  that  an  instrument  pay- 
able "with  exchange"  does  not  lose  its  negotiability. 

Counsel  suggests  that  the  amount  of  exchange  is 
usually  ascertainable  in  advance  while  collection 
charges  are  not  so  ascertainable. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  November, 

1917,  page  880.) 

While  a  bill  containing  a  provision  for  payment 
of  the  costs  of  collection  and  attorney's  fees,  if  it  is 
dishonored  at  maturity,  is  a  valid  negotiable  instru- 
ment, a  bill  drawn  for  a  fixed  sum  "with  collection 
charges"  is  not  a  negotiable  instrument  unless  it 
is  so  drawn  as  to  show  that  no  collection  charges  are 
to  be  included  unless  the  bill  is  dishonored  at  ma- 
turity. 

(Opinion    of   Counsel,    Federal    Reserve   Bulletin,   August, 

1918,  page  745.) 

A  bill  made  payable  to  the  order  of  the  drawee 
is  not  negotiable  until  the  drawee  as  payee  has  in- 
dorsed it.  When  it  has  been  accepted  and  indorsed 
by  the  drawee  it  is  a  valid  negotiable  instrument  in 
the  hands  of  a  third  party,  and  the  drawer  is  not 
released,  since  the  terms  of  his  order  have  been 
specifically  complied  with. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  February, 

1918,  page  110.) 

Under  the  terms  of  the  negotiable  instruments 
law  a  bill  of  exchange  may  be  accepted  before  it 
has  been  signed  by  the  drawer. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 

1919,  page  1157.) 

An  express  provision  in  a  bill  of  lading  authoriz- 
ing the  consignee  to  inspect  the  goods  before  ac- 


Rediscounts  111 

ceptance  of  the  draft  to  which  the  bill  of  lading  is 
attached  does  not  affect  the  negotiability  of  the 
draft. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1919,  page  468.) 

DEFINITION  OF  TRADE  ACCEPTANCE 
Regulations  of  Federal  Reserve  Bosurd 

A  trade  acceptance  is  defined  as  a  draft  or  bill  Trade 
of  exchange,  drawn  by  the  seller  on  the  purchaser  ^"^p*^<=« 
of  goods  sold,*  and  accepted  by  such  purchaser. 

(Regulation  A,  Series  of  1920,  A,  V.) 

Opinions  and  Rulings 

A  draft  to  be  elip^ible  as  a  trade  acceptance  must  Acceptance 
be  accepted  by  the  drawee  and  not  by  anyone  else. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1916,  page  112.) 

A  trade  acceptance  containing  the  statement  that  staiemenu 
"the  obhgation  of  the  acceptor  hereof  arises  out  of  ment*™" 
the  purchase  of  goods  from  the  drawer  as  per  in- 
voices, a  record  of  which  is  given  in  the  subjoined 
statement,"  is  a  valid  and  desirable  acceptance  when 
offered  with  the  "subjoined  statement"  detached  in 
accordance  with  directions  in  the  form. 

An  acceptance  to  pay  at  a  particular  place  dif-  Place  of 
ferent  from  the  residence  of  the  acceptor  is  a  gen-  ac^Slce 
eral  acceptance,  unless  it  expressly  states  that  the 
bill  is  to  be  paid  there  and  not  elsewhere,  and  does 
not  render  the  bill  nonnegotiable. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1919,  page 
142.) 

*A  consignment  of  goods  or  a  conditional  sale  of  goods  can 
not  be  considered  "goods  sold"  -within  the  meaning  of  this 
clause.  The  purchase  price  of  goods  plus  the  cost  of  labor  in 
effecting  their  installation  may  be  included  in  the  amount  for 
which  the  trade  acceptance  is  drawn. 


112 


Commercial     Banking     Practice 


Discount  for 
payment  at 
maturity 


Discount  for 
prepayment 


Acceptance 
based  on 
foreign 
shipments 


Acceptances 
based  on 
future  pur- 
chases 


A  trade  acceptance  which  consists  of  an  order  to 
pay  a  certain  amount,  which  is  the  amount  of  the 
debt  minus  a  discount  for  prompt  payment  at  ma- 
turity, or,  if  not  paid  at  maturity,  to  pay  a  greater 
amount,  which  is  the  amount  of  the  debt  without 
any  discount,  is  an  order  to  pay  a  sum  certain  and 
is  negotiable. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  March,  1918, 
page  200.) 

A  trade  acceptance  providing  for  a  fixed  dis- 
count, if  paid  at  a  certain  time  before  maturity, 
should  not  be  approved  for  general  use  by  the  Fed- 
eral Reserve  Board. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1918,  page  871.) 

On  the  basis  of  the  facts  submitted  in  this  case,  it 
is  held  that  a  ninety- day  sight  draft  drawn  by  a  firm 
in  Calcutta  on  a  company  in  Boston  and  accepted 
by  that  firm,  covering  a  transaction  involving  the 
transportation  of  merchandise  from  Calcutta  to 
Honolulu,  is  a  trade  acceptance  rather  than  a 
banker's  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1915,  page 
404.) 

The  fact  that  importation  or  exportation  is  in- 
volved does  not  exclude  the  character  of  a  trade 
acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1916,  page  168.) 

A  bill,  in  order  to  be  a  trade  acceptance,  must 
arise  out  of  the  purchase  of  goods,  and  unless  that 
purchase  is  either  consummated  or  actually  con- 
tracted for  at  the  time  the  bill  is  drawn,  it  is  doubt- 
ful whether  it  can  properly  be  said  that  the  obhga- 
tion  arises  out  of  the  purchase  of  goods. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1917,  page  378.) 


Rediscounts  113 

A  draft  dra^\ii  by  a  casualty  company  against  a  Drafuin 
policy  holder  for  premiums  could  hardly  be  said  to  bsurance 
be  a  draft  by  the  seller  on  the  purchaser  of  goods  p^^™""» 
sold  and  would  not,  in  the  opinion  of  the  Board, 
come  within  the  Board's  present  definition  of  a 
trade  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1918,  page  309.) 

An  acceptance  which  provides  that  the  di-awer  Conditional 
is  to  retain  title  to  the  goods  until  payment  of  the  ^3,"" 
acceptance  is  not  consistent  with  the  requirement 
of  a  legitimate  trade  acceptance  that  the  title  shall 
have  passed  to  the  drawee  at  the  time  of  acceptance. 
The  actual  sale  of  goods  and  not  what  is  generally 
termed  a  conditional  sale  of  goods  must  be  the  basis 
of  the  acceptance. 

(Ruling,    Federal    Reserve    Bulletin,    October,    1919,    page 
964..) 


ELIGIBLE  DRAFTS   AND   TRADE   ACCEPTANCES 
Statutory  Provisions 

Anj^  Federal  reserve  bank  may  discount  notes,  Commercial 
drafts,  and  bills  of  exchange  arising  out  of  actual  p^p" 
commercial  transactions;  that  is,  notes,  drafts,  and 
bills  of  exchange  issued  or  drawn  for  agricultural, 
industrial,  or  conmiercial  purposes,  or  the  proceeds  Agricultural 
of  which  have  been  used,  or  are  to  be  used,  for  such  ^^^^ 
purposes,  the  Federal  Reserve  Board  to  have  the 
right  to  determine  or  define  the  character  of  the 
paper  thus  eligible  for  discount,  within  the  mean- 
ing of  this  Act.     Nothing  in  this  Act  contained 
shall  be  construed  to  prohibit  such  notes,  drafts, 
and  bills  of  exchange,  secured  by  staple  agricul- 
tural products,  or  other  goods,  wares,  or  merchan- 


114 

Paper  based  on 
United  States 
obligations 


Paper  secured  by 
bonds  of 
War  Finance 
Corporation 


Commercial     Banking     Practice 


Conditions  of 
eligibility 


Commercial 
origin 


Security 


I 


disc  from  being  eligible  for  such  discount ;  [or] 
notes,  drafts,  or  bills   .   .   .   issued  or  dra\\Ti  for  the 
purpose  of  carrying  or  trading  in  .   .   .   bonds  and 
notes  of  the  Government  of  the  United  States. 

(Federal  Reserve  Act,  Section  13.) 

The  Federal  reserve  banks  shall  be  authorized 
to  rediscount  ehgible  paper  secured 
by  .  .  .  bonds  [of  the  War  Finance  Cor- 
poration] and  indorsed  by  a  member  bank.  No  dis- 
count or  rediscount  under  this  section  shall  be 
granted  at  a  less  interest  charge  than  one  per 
centum  per  annum  above  the  prevailing  rates  for 
eligible  commercial  paper  of  corresponding  ma- 
turity. 

(War  Finance  Corporation  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Board 

The  Federal  Reserve  Board,  exercising  its 
statutory  right  to  define  the  character  of  a  note, 
draft,  or  bill  of  exchange  eligible  for  rediscount  at  a 
Federal  reserve  bank,  has  determined  that — 

It  must  be  a  note,  draft,  or  bill  of  exchange  which 
has  been  issued  or  dra^vn,  or  the  proceeds  of  which 
have  been  used  or  are  to  be  used  in  the  first  instance, 
in  producing,  purchasing,  carrying,  or  marketing 
goods*  in  one  or  more  of  the  steps  of  the  process  of 
production,  manufacture,  or  distribution,  or  for  the 
purpose  of  carrying  or  trading  in  bonds  or  notes 
of  the  United  States. 

It  may  be  secured  by  the  pledge  of  goods  or 
collateral  of  any  nature,  including  paper,  which  is 

*When  used  in  this  regulation  the  word  "goods"  shall  be 
construed  to  include  goods,  wares,  merchandise,  or  agricul- 
tural products,  including  live  stock. 


Rediscounts  115 

ineligible   for  rediscount,   provided  it    (the   note, 
draft,  or  bill  of  exchange)  is  otherwise  eligible. 
(Regulation  A,  Series  of  1920,  A,  II.) 

Opinions  and  Rulings 

Bills  drawn  for  the  purpose  of  providing  funds  Based  on 
for  the  purchase  and  export  of  cross-ties  and  lum-  foTe^orf 
ber  to  Cuba  are  eligible  for  rediscount  if  properly 
indorsed  and  otherwise  conforming  to  the  regula- 
tions of  the  Federal  Reserve  Board. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1915,  page 

268.) 

Where  a  railroad  company  purchasing  supplies  Based  on 

[accepts  the  draft  of  the  seller  and  the  seller  or  a  railroad 

third  party  to  whom  the  draft  is  sold  in  good  faith  »"pp'»es 

discounts  it  mth   a  member  bank,  such  draft  is 

eligible  for  rediscount  with  a  Federal  reserve  bank. 

(Opinion   of  Counsel,   Federal   Reserve   Bulletin,   October, 
1918,  page  974.) 

An  acceptance  drawn  by  a  gas  producing  com-  Based  on 
pany  on  a  gas  distributing  company  and  accepted  deiiv^ 
by  the  latter  in  payment  for  gas  sold  and  dehvered  °^  ^^ 
is  a  trade  acceptance,  eligible  for  rediscount  by  a 
Federal  reserve  bank. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1918,  page  435.) 

A  draft  drawn  by  a  lumber  corporation  upon  a  Acceptances 
sales  corporation  which  it  and  a  number  of  other  corporations 
lumber  concerns  have  organized  will,  when  ac- 
cepted, become  a  trade  acceptance,  even  though  the 
selling  corporation  is  a  stockholder  of  the  sales  cor- 
poration, provided  the  latter  is  organized  in  good 
faith  and  not  merely  to  act  as  an  agent  for  the  pur- 
pose of  evading  the  law. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  January, 
1918,  page  33.) 


116 


Commercial     Banking     Practice 


Acceptance 
before  de- 
livery on 
insbJlment 
plan  sales 


Based  on 

buUding 

operations 


Based  on 
electrical 
installation 


Based  on 

retail 

transactions 


Regarding  the  use  of  trade  acceptances  in  con- 
nection with  the  sale  of  coffee  mills,  etc.,  on  an 
installment  plan,  if  the  purchaser  is  willing  to  ac- 
cept a  draft  in  advance  of  the  delivery  of  the  goods 
there  would  seem  to  be  no  reason  why  such  an 
acceptance  should  not  be  treated  on  the  same  basis 
as  a  bill  drawn  and  accepted  after  delivery  of  such 
goods. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1918,  page  437.) 

It  is  impossible  to  promulgate  any  general 
ruling.  There  does  not  seem  to  be  any  doubt  that 
a  draft  drawn  by  a  manufacturer  or  material  man 
upon  a  builder  to  cover  the  cost  of  materials  sold 
to  the  builder  is  eligible  for  rediscount  as  a  trade 
acceptance  when  accepted  by  the  builder.  It  is 
equally  clear,  however,  that  if  the  contractor,  for 
instance,  does  not  get  title  either  to  the  materials 
furnished  or  to  the  building  as  it  is  being  erected, 
he  can  not  properly  make  a  trade  acceptance  of  a 
draft  drawn  upon  him  by  the  subcontractor  or 
builder,  it  being  apparent  that  he  has  not  been  the 
purchaser  of  goods  sold  within  the  meaning  of  the 
Board's  regulations.  The  Board  is  not  inclined  to 
extend  the  scope  of  its  definition  of  the  word 
"goods"  to  include  labor  alone. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1919,  page  665.) 

Drafts  drawn  for  the  purchase  price  of  electrical 
goods,  including  the  cost  of  installation,  may  be 
treated  as  trade  acceptances  when  such  drafts  are 
accepted  by  the  purchaser. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1918,  page  310.) 

A  bill  of  exchange  drawn  by  the  seller  of  goods 
and  accepted  by  the  purchaser  of  those  goods  is  a 
trade  acceptance,  regardless  of  whether  or  not  the 


Rediscounts  117 

urchaser  intends  to  resell  the  goods  or  to  use  them 
or  his  own  purpose.  Therefore,  a  retail  dealer 
lay  finance  the  sale  of  his  goods  to  a  retail  cus- 
jmer  by  means  of  the  trade  acceptance. 

A  bill  drawn  by  a  retail  dealer  on  his  retail  cus- 
jmer  to  finance  the  sale  of  goods  to  that  customer 
;  a  trade  acceptance  within  the  meaning  of  the  Acceptances  in 
Joard's  regulations,  even  though  it  is  drawn  after  onpen"" 
he  purchaser  has  failed  to  remit  promptly  on  an  accounts 
ipen  account. 

The  Board  is  of  the  opinion,  however,  that  the 
ittempt  to  use  a  trade  acceptance  in  this  manner  as 
•  means  of  liquidating  an  otherwise  slow  account 
rould  involve  considerable  danger  to  the  primary 
)urposes  of  the  trade  acceptance  movement  and 
70uld  subordinate  the  trade  acceptance  to  the  open 
-ccount  by  suggesting  it  as  a  last  resort  for  bad 
[ebts. 

A\niile,  therefore,  trade  acceptances  of  this  char- 
acter should  probably  be  considered  eligible  as  a 
natter  of  law,  nevertheless  member  banks  and  Fed- 
:ral  reserve  banks  should  be  encouraged  to  discrim- 
nate  against  them  as  far  as  possible. 

(Ruling,  Federal  Reserve  Bulletin^  January,  1918,  page  30.) 

Drafts   of   cotton   producers   or   owners   drawn 
ipon  and  accepted  by  cotton  factors  may  be  eli-  cowon  factors" 
^ible    for    rediscount    when    discounted    by    the 
irawers. 

(Ruling,  Federal  Reserve  Bulletin,  November,  1920,  page 
•1177.) 

The  Federal  Reserve  Board  may  properly  rule  Acceptances  based  on 

,-,         advertising  space 

;hat  a  draft  or  bill  of  exchange  drawn  by  the  seller 
i)n  the  purchaser  of  advertising  space  and  accepted 
jy  such  purchaser  is  a  trade  acceptance. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  February, 
1917,  page  116.) 


118  Commercial     Banking     Practice 


I 


Conditionf  A  draft  OP  bill  of  exchange  drawn  by  a  publisher 

or  other  advertising  agency  on  the  purchaser  of  ad- 
vertising space,  and  accepted  by  such  purchaser, 
shall  be  considered  a  trade  acceptance,  provided  the 
advertisement  on  which  the  draft  or  bill  is  based  is 
for  the  purpose  of  promoting  or  facihtating  the 
production,  manufacture,  distribution,  or  sale  of 
goods,  wares,  merchandise,  or  agricultural  prod- 
ucts, including  live  stock,  and  provided,  further, 
that  such  advertisement  is  not  illegal  and  is  not  for 
the  purpose  of  promoting  or  facilitating  any  trans- 
action which  is  prohibited  by  the  laws  of  the  state 
in  which  it  is  to  be  consummated. 

(Ruling,  Federal  Reserve   Bulletin,  February,   1917,  page 
114.) 

Domidie  Although  a  draft  drawn  by  an  American  ex- 

'**"•  porter  upon  a  foreign  buyer  and  accepted  by  that 

buyer  payable  in  the  United  States  in  dollars  may 
be  technically  ehgible  for  discount  under  the  terms 
of  section  13  of  the  Federal  Reserve  Act,  neverthe- 
less, a  Federal  reserve  bank  may,  in  its  discretion, 
decline  to  discount  such  an  acceptance  on  the 
ground  that  inasmuch  as  it  is  a  domicile  bill,  it  is 
not  a  desirable  investment. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  April,  1920, 
page  386.) 

INELIGIBLE  DRAFTS  AND  TRADE  ACCEPTANCES 
Statutory  Provisions 

Security  The  Federal  Reserve  Board    .    .    .  [shall]  have 

P'*®'  the  right  to  determine  or  define  the  character  of  the 

paper  thus  ehgible  for  discount,  within  the  meaning 
of  this  Act  .  .  .  but  such  definition  shall  not  include 
notes,  drafts,  or  bills  covering  merely  investments 
or  issued  or  drawn  for  the  purpose  of  carrying  or 


Rediscounts  119 

trading  in  stocks,  bonds,  or  other  investment  securi- 
ties, except  bonds  and  notes  of  the  Government 
Df  the  United  States. 

(Federal  Reserve  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Board 

The  paper  must  not  be  a  note,  draft,  or  bill  of  f,^^  *' 
exchange  the  proceeds  of  which  have  been  used  or  'nvesbnenu 
.are  to  be  used  for  permanent  or  fixed  investments 
of  any  kind,  such  as  land,  buildings,  or  machinery, 
or  for  any  other  capital  purpose. 

The  paper  must  not  be  a  note,  draft,  or  bill  of  Speculative 
exchange  the  proceeds  of  which  have  been  used  or  °^^^^^^'^'^^ 
are  to  be  used  for  investments  of  a  purely  specula- 
tive character  or  for  the  purpose  of  lending  to  some 
other  borrower. 

(Regulation  A,  Series  of  1920,  A,  II.) 

Opinions  and  Rulings 
The  Board's  conception  of  the  trade  acceptance  Draft*  to  finance 

.        ,  .      .  .  I'l  •  •        capital  re- 

is  that  it  IS  an  instrument  which  carries  upon  its  quiremenis 
face  the  evidence  of  the  commercial  character  of  the 
transaction  which  gave  it  birth.    The  finance  paper 

of  the Corporation  issued  against  drafts 

drawn  by  it  on  dealers  and  placed  in  trust  to  secure 
such  paper  issued  by  it  in  the  shape  of  notes  or  cer- 
tificates gives  no  indication  whatever  as  to  the 
nature  of  the  security,  which  may  or  may  not  be 

.  ehgible  paper. 

It  appears  to  the  Board  that  the Corr 

poration  by  issuing  notes  of  this  character  is  really 
raising  money  for  capital  requirements  for  similar 
transactions  in  the  future,  and  that  the  whole  plan 
is  in  essence  a  finance  operation  rather  than  a  com- 

jmercial  transaction. 

i       (Ruling,  Federal  Reserve  Bulletin,  February,   1918,  page 
109.) 


120 


Commercial     Banking     Practice 


DrafU 

against 
wine  in 
bond 


Drafts  to 
finance 
war  savings 
stamps 


Hnancial 
statements 


Character 
of  evidence 


Stamp 
is  not 
conclusive 


The  Board  is  of  the  opinion  that  a  warehouse 
receipt  covering  wine  in  bond,  whether  intended  for 
sacramental  or  other  purposes,  can  not  be  consid- 
ered a  receipt  conveying  or  securing  title  to  "readily 
marketable  staples"  within  the  meaning  of  section 
13  of  the  Federal  Reserve  Act,  and  consequently 
that  drafts  secured  by  warehouse  receipts  covering 
such  wine  are  not  ehgible  for  rediscount  by  Federal 
reserve  banks. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1921,  page  419.) 

Notes,  drafts,  and  bills  of  exchange  which  are 
secured  by  war  savings  stamps  and  the  proceeds  oi 
which  were  used  to  purchase  or  carry  war  savings 
stamps  are  ineligible  for  rediscount  with  a  Federal 
reserve  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  July,  1918, 
page  637.) 

EVIDENCE  OF  ELIGIBILITY 
Regulations  of  Federal  Reserve  Board 

A  Federal  reserve  bank  shall  take  such  steps  as 
it  deems  necessary  to  satisfy  itself  as  to  the  eli- 
gibility of  the  draft,  bill,  or  trade  acceptance  offered 
for  rediscount  and  may  require  a  recent  financial 
statement  of  one  or  more  parties  to  the  instrument. 
The  draft,  bill,  or  trade  acceptance  should  be  drawn 
so  as  to  evidence  the  character  of  the  underlying 
transaction,  but  if  it  is  not  so  drawn  evidence  of 
eligibility  may  consist  of  a  stamp  or  certificate  af- 
fixed by  the  acceptor  or  drawer  in  a  form  satisfac- 
tory to  the  Federal  reserve  bank. 

(Regulation  A,  Series  of  1920,  A,  V.) 

Opinions  and  Rulings 

The  fact  that  a  land  company  has  stamped  a 
bill  a  trade  acceptance  and  has  signed  such  state- 


Rediscounts  121 

aent  as  "acceiDtor"  does  not  in  itself  make  it  a  trade 
rCceptance. 
(Ruling,  Federal  Reserve  Bulletin,  March,  1916,  page  112.) 

MATURITY 
Opinions  and  Rulings 

A  draft  made  "payable  on  arrival  of  car"  is  non-  Drafts 
legotiable,  not  being  payable  at  a  determinable  on^cllldition 
'uture  time,  and  is  therefore  ineligible  for  redis- 
ount  by  a  Federal  reserve  bank. 

(Opinion    of    Counsel,    Federal    Reserve    Bulletin,    August, 
915,  page  219.) 

Drafts  payable  "ninety  days  from  date  or  before  Drafts  payable 

)n  five  days  after  demand  (i.  e.,  on  five  daj^s'  notice)  "<>"  ?•■  before" 
)y  the  holder  hereof"  are  negotiable  and  eligible  for 
liscount  ^vith  a  Federal  reserve  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  April,  1917. 
3age   291.) 

See   also    "Rediscount   of    Promissory    Notes," 
Dages  94-96,  above. 

AMOUNT  OF  PAPER  OF  ONE  INTEREST 
REDISCOUNTABLE  FOR  ONE  MEMBER  BANK 

Opinions  and  Rulings 

What  Constitutes  "Actually  Existing  Values." 

A  trade  acceptance  may  or  may  not  be  classified  Trade 
IS  a  bill  of  exchange  dra^vn  against  actually  existing  ^"^p*^"* 
[ralues. 

Section  13  of  the  Federal  Reserve  Act  limits  the  Ten  per  cent 
amount  of  paper  of  any  one  borrower  rediscounted  '""' 
for  any  one  bank  to  ten  per  cent,  of  such  bank's 
capital  and  surplus ;  and  trade  acceptances  are  sub- 
ject to  this  limitation,  unless  they  can  be  classified 
as  "bills  of  exchange  drawn  against  actually  exist- 
ing values." 


I 


122 


Commercial     Banking     Practice 


Acceptance 
before  sale 
or  delivery 


Drafts 
discounted 
before 
acceptance 


Acceptances 

without 

documents 


Trade  acceptances 
for  long  standing 
open  accounts 


Bills  drawn  by  the  seller  against  the  purchaser 
and  accepted  before  the  sale  or  delivery  of  the  goods 
should  not  be  treated  as  bills  drawn  against  actually 
existing  values,  since  such  goods  are  not  in  the  pos- 
session of  the  drawee  either  in  the  original  form 
or  in  the  shape  of  the  proceeds  of  their  sale ;  except 
where  the  goods  have  passed  out  of  the  possession 
of  the  drawer  and  have  been  placed  in  storage  sub- 
ject to  the  control  or  order  of  the  drawee. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  October, 
1918,  page  974.) 

A  bill  of  exchange  discounted  before  acceptance 
may  be  said  to  be  drawn  against  actually  existing 
values,  within  the  meaning  of  section  13  of  the 
Federal  Reserve  Act,  when  and  only  when  it  is 
accompanied  by  shipping  documents,  warehouse  re- 
ceipts, or  other  papers  securing  title  to  the  goods 
sold. 

An  accepted  bill  of  exchange,  unaccompanied  by 
shipping  documents  or  other  such  papers,  may  be 
considered  as  dra^vn  against  actually  existing 
values  if  drawn  against  the  drawee  at  the  time  of, 
or  within  a  reasonable  time  after,  the  shipment  or 
delivery  of  the  goods  sold.  In  this  latter  case  there 
must  be  reasonable  grounds  to  beheve  that  the 
goods  are  in  existence  in  the  hands  of  the  drawee 
either  in  their  original  form  or  in  the  shape  of  the 
proceeds  of  their  sale. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  March, 
1917,  page  195.) 

A  bill  drawn  for  a  balance  due  on  open  account 
of  long  standing,  which  is  accepted  by  the  debtor, 
might  constitute  a  trade  acceptance,  but  in  order 
for  it  to  be  excepted  from  the  limitations  imposed 
by  section  13  of  the  Federal  Reserve  Act  as  a  bill  of 


Rediscounts  128 

*  exchange  drawn  against  actually  existing  value,  it 
must  have  been  drawn  contemporaneously  ^vith,  or 
within  such  a  reasonable  time  after,  the  shipment  of 
the  goods  as  to  justify  the  assumption  that  the 
goods  are  in  the  hands  of  the  drawee  in  their  original 
form  or  in  the  form  of  proceeds  of  sale. 

As  evidence  of  this  fact,  Federal  reserve  banks  Evidence  of 
might  reasonably  require  such  trade  acceptances  as  ^jue"  ^  ^^^^ 
are  offered  as  "bills  of  exchange  drawn  against 
actually  existing  value"  to  show  the  date  of  invoice, 
so  that  it  may  be  determined  whether  or  not  the  ac- 
count is  one  of  long  standing. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1917,  page  287.) 

A  bill  of  exchange  drawn  payable  "at  sight"  and  Qualified 

P  ,        .  T/5    J  acceptances 

accepted  payable  in  three  months  is  a  qualified  or 
conditional  acceptance,  and  the  maker  and  prior 
indorsers  are  released.  The  instrument  in  effect 
becomes  the  promissory  note  of  the  acceptor,  and 
would  not  come  within  the  exception  to  section  13 
of  a  bill  of  exchange  drawn  in  good  faith  against 
actually  existing  value. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1916,  page  463.) 

In  the  opinion  of  the  Board,  accepted  demand  ^l^l^ 
bills  on  which  the  drawer  is  released  from  liability  bills 
are  not  "bills  of  exchange"  within  the  meaning  of 
i  section  13  and  must,  therefore,  be  included  in  de- 
termining the  limits  on  the  amount  of  paper  of  any 
one  borrower  which  a  Federal  reserve  bank  may 
rediscount  for  any  member  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  November, 
1919,  page  1055.) 

See   also   "Rediscount   of   Promissory   Notes," 
pages  97-103,  above. 


124  Commercial     Banking     Practice 

AGGREGATE  AMOUNT  REDISCOUNTABLE  FOR 
ONE  BANK 

See  "Rediscount  of  Promissory  Notes,"  pages 
103-104,  above. 

INDORSEMENT  OF  MEMBER  BANKS 

See   "Rediscount  of  Promissory  Notes,"   page 
104,  above. 

REDISCOUNT  FOR  NONMEMBER  BANKS 

See  "Rediscount  of  Promissory  Notes,"  pages 
104-106,  above. 


Rediscount  of  Six  Months*  Agricultural 

Paper 

DEFINITION 

Regulations  of  Federal  Reserve  Board 

Six  months'  agricultural  paper,  within  the  mean-  Uve  stock 
ing  of  this  regulation,  is  defined  as  a  note,  draft,  Sded 
bill  of  exchange,  or  trade  acceptance  drawn  or  is- 
sued for  agricultural  purposes,  or  based  on  live 
stock;  that  is,  a  note,  draft,  bill  of  exchange,  or 
trade  acceptance  the  proceeds  of  which  have  been 
used,  or  are  to  be  used,  for  agricultural  purposes, 
including  the  breeding,  raising,  fattening,  or  mar- 
keting of  live  stock,  and  which  has  a  maturity  at 
the  time  of  discount  of  not  more  than  six  months, 
exclusive  of  days  of  gi'ace. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A,  Series 
of  1920,  A,  VI.) 

Opinions  and  Rulings 

The  term  "live  stock"  is  held  to  include  not  only  Livestock 
beef  cattle,  but  also  horses  and  mules. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1916,  page  72.) 

Notes  made  by  mule  and  cattle  dealers  are  mer-  Notes  of 
cantile  rather  than  agricultural  paper.  ""'®  ^^^"' 

(Ruling,  Federal  Reserve  Bulletin,  August,  1915,  page  212.) 

A  note  made  by  a  dealer  in  agricultural  imple-  Notes  of 

.      .  ,  •       1 1  1  implement  dealers 

ments  is  not  agricultural  paper. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1915,  page  212.) 

Paper  covering  sales  by  a  manufacturer  of  agri-  Sales  to 
cultural  implements  to  a  dealer  for  resale  by  him  "°p*™^" 
to  a  farmer  would  have  to  be  treated  as  commercial 
and  not  as  agricultural  paper. 

(Ruling,  Federal  Reserve  Bulletin,  November,   1918,  page 
1118.) 


126 


Agricultural 
and  com- 
mercial paper 
distinguished 


Commercial     Banking     Practice 


Agricultural 
purposes 


Authority  of 
Federal 
Reserve  Board 


Limitations 


I 


The  purchase  and  sale  of  any  articles  or  com 
modities  including  agricultural  products  is  a  com- 
mercial rather  than  an  agricultural  transaction. 
The  note  of  a  farmer,  however,  given  in  payment 
for  articles  or  commodities  purchased  may  be  con- 
sidered agricultural  paper,  provided  that  the  ar- 
ticles or  commodities  purchased  are  to  be  used  by 
the  farmer  for  agricultural  purposes  and  are  not 
in  the  nature  of  permanent  or  fixed  investments. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1920,  pages 
1302,  1303.) 

ELIGIBLE  AGRICULTURAL  PAPER 
Statutory  Provisions 

Any  Federal  reserve  bank  may  discount  .... 
notes,  drafts,  and  bills  of  exchange  issued  or  drawn 
for  agi'icultural  ....  purposes,  or  the  proceeds 
of  which  have  been  used,  or  are  to  be  used,  for 
such  purposes,  the  Federal  Resei-ve  Board  to 
have  the  right  to  determine  or  define  the  char- 
acter of  the  paper  thus  eligible  for  discount,  with- 
in the  meaning  of  this  Act.  Nothing  in  this  Act 
contained  shall  be  construed  to  prohibit  such  notes, 
drafts,  and  bills  of  exchange,  secured  by  staple 
agricultural  products  ....  from  being  eligible 
for  such  discount  ....  Notes,  drafts,  and  bills 
drawn  or  issued  for  agricultural  purposes  or  based 
on  live  stock  and  having  a  maturity  not  exceeding 
six  months,  exclusive  of  days  of  grace,  may  be  dis- 
counted in  an  amount  to  be  limited  to  a  percentage 
of  the  assets  of  the  Federal  reserve  bank,  to  be 
ascertained  and  fixed  by  the  Federal  Reserve 
Board. 

(Federal  Reserve  Act,  Section  13.) 


Rediscounts  127 

Regulations  of  Federal  Reserve  Board 

To  be  eligible  for  rediscount,  six  months'  agri-  Conclitions 

cultural  paper,  whether  a  note,  draft,  bill  of  ex-  °    ^^  ^ 

change,  or  trade  acceptance,  must  comply  with  the 

respective  sections  of  this  regulation*  which  would 

apply  to  it  if  its  maturity  were  ninety  days  or  less. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1920,  A,  VI.) 

Opinions  euid  Rulings 

A  farmer's  six  months'  note  for  commercial  fer-  Notes  for 
tilizer,  discounted  and  indorsed  by  a  member  bank,  *®    "  ' 
is  agricultural  paper  eligible  for  rediscount  with 
the  Federal  reserve  bank. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1915,  page  75.) 

j  The  Act  does  not  require  the  taking  of  chattel  Chattel  mortgages 
mortgages  as  security  for  loans  based  on  agricul-  ™"^"*'^y 
tural  operations.  The  statement  of  the  member 
bank  to  this  effect  must  ordinarily  be  accepted. 
The  direct,  primary  purpose  of  the  loan  should  be 
for  the  ordinary  operations  of  agriculture.  Words 
"based  on"  are  not  considered  synonj^mous  with 
"secured  by."  Agricultural  paper  need  not  be  di- 
rectly secured  by  agricultural  products,  but  should 
be  genuinely  based  upon  transactions  entered  upon 
for  agricultural  operations.  General  banking  pru- 
dence and  knowledge  should  be  applied. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1915,  page  72.) 

Xotes  signed  by  a  farmer,  the  proceeds  of  which  Notes  for 
are  used  for  the  purchase  of  cows  to  be  used  as  dairy    "^  "  ® 
cattle,  are  eligible  for  rediscount  at  the  discretion 
of  the  Federal  reserve  bank  notwithstanding  the 

*For  conditions  of  eligibility  of  promissory  notes,  see  pages 
77-94,  above.  For  conditions  of  eligibility  of  drafts  and  trade 
acceptances,  see  pages  113-121,  above. 


128 


Commercial     Banking     Practice 


Cattle  for 
breeding, 
grazing,  or 
fattening 


Use  of 
mortgages 


Fann 
tools  and 
equipment 


I 


fact  that  the  cattle  are  not  primarily  purchased  for 
"breeding,  raising,  fattening,  and  marketing  of 
live  stock." 

(Ruling,  Federal  Reserve  Bulletin,  March,  1916,  page  112.) 

Loans  on  cattle  for  breeding,  grazing,  or  fatten- 
ing may  be  made  under  the  classification  of  six 
months'  agricultural  paper  and  the  paper  may  be 
rediscounted  by  a  member  bank  at  its  Federal  re- 
serve bank. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1916,  page 
679.) 

A  loan  made  by  a  member  bank  in  good  faith  to 
a  farmer  for  the  purpose  of  assisting  him  to  produce 
a  crop  to  fatten  his  cattle  would  be  eligible  for  dis- 
count by  a  Federal  reserve  bank,  whether  secured 
by  mortgage  or  not,  but  most  of  the  farmers'  notes 
which  have  been  discounted  w^ith  Federal  reserve 
banks  for  member  banks  are  secured  by  chattel 
mortgages. 

(Ruling,  Federal  Reserve  Bulletin,  May,  1917,  page  378.) 

Farm  tools,  agricultural  implements  and  machin- 
ery, or  other  farm  operating  equipment  do  not 
constitute  permanent  and  fixed  investments  when 
they  are  of  such  character  that  they  have  to  be  re- 
placed within  a  comparatively  short  time,  so  that  it 
may  be  assumed  that  a  certain  amount  of  money 
would  be  spent  annually  and  regularly  for  their  re- 
placement. Notes  of  farmers  or  consumers  given 
for  the  purchase  price  of  such  equipment  are  dis- 
countable as  notes  drawn  or  issued  for  agricultural 
purposes. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1920,  page 
1302.) 


Rediscounts  129 

Presentation  of  notes  of  farmers  or  consumers  Presenution 
for  the  purchase  price  of  farm  tools  or  agricultural 
machinery  by  the  dealer  with  his  indorsement  for 
rediscount  does  not  change  their  classification  as  for 
agricultural  purposes. 

(Ruling,   Federal   Reserve  Bulletin,   February,   1916,   page 
67.) 

Where  tractors  are  used  to  supplement  the  work  N°^« '" 
of  horses  or  mules,  or  are  used  altogether  instead  of  tractors 
these  animals,  it  is  held  that  notes  given  by  farmers 
for  the  purchase  price  of  tractors,  and  maturing 
within  six  months,  should  be  admitted  to  discount 
as  agricultural  paper. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1918,  page  309.) 

Farmers'  notes,  the  proceeds  of  which  are  used  ™"8  •"'^  , 

^  .     .  1         1       1  J        •       draining  land 

for  tilling  farms  or  for  drammg  land  already  in 
use  as  farm  land,  should  be  classified  as  agricultural 
paper  and  are  eligible  for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1918,  page  743.) 

A  note  given  for  the  purchase  price  of  a  com-  Discount  by 
modity  can  be  classed  as  agricultural  paper  eligible  "jorser 
for  rediscount  when  having  a  maturity  in  excess  of 
ninety  days,  if  the  maker  is  to  use  the  commodity  for 
an  agricultural  purpose,  regardless  of  whether  the 
note  is  discounted  by  the  maker  or  by  the  indorser. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  April,  1918, 
page  312). 

Where  a  farmer  makes  his  note  pavable  to  the  Paper 

n  1  payable  to 

seller  of  a  commodity,  and  actua%  uses  the  com-  seller  of 
modity  for  agricultural  purposes,  such  a  note  may  ""™»<^'y 
be  treated  as  agricultural  paper,  whether  discounted 
with  the  member  bank  by  the  farmer  as  the  maker 
or  by  the  seller  as  the  indorser. 


130 


Commercial     Banking     Practice 


Paper 
payable 
to  bank 


Paper  of 
irrigation 
company 


Note  for 
irrigation 

purposes 


Where  the  farmer  makes  his  note  payable  to  the 
member  bank  and  uses  the  proceeds  for  an  agri- 
cultural purpose,  such  a  note  may  likewise  be  dis- 
counted by  a  Federal  reserve  bank  as  agricultural 
paper.  If,  however,  in  either  of  the  foregoing  cases 
the  farmer  does  not  use  or  intend  to  use  the  com- 
modity purchased  for  an  agricultural  purpose,  al- 
though it  is  capable  of  being  so  used,  the  note  in 
question  should  be  treated  as  commercial  paper  and 
not  as  agricultural  paper. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1918,  page  310.) 

"VMiere  there  is  offered  for  rediscount  as  agricul- 
tural paper  the  note  of  an  irrigation  company  which 
owns  and  operates  an  irrigation  system  and  a  rice 
farm,  the  Federal  reserve  bank  must  be  satisfied 
that  the  proceeds  of  the  particular  note  have  been 
in  fact  used  for  an  agricultural  purpose  in  connec- 
tion with  the  rice  farm,  as  distinguished  from  a  com- 
mercial purpose  in  connection  with  the  delivery  and 
sale  of  water  to  farmers  through  the  irrigation 
system. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1920,  page 
949.) 

A  farmer's  note  given  to  an  irrigation  company 
in  payment  for  a  supply  of  water  which  has  been  or 
is  to  be  used  for  current  agricultural  purposes  is  a 
note  which  has  been  issued  by  the  farmer  for  an 
agricultural  purpose  and  maj^  therefore,  be  eligible 
for  discount  with  a  maturity  not  in  excess  of  six 
months,  provided,  of  course,  it  complies  in  other 
respects  with  the  provisions  of  the  law  and  the  regu- 
lations of  the  Board. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1921,  page  964.) 


Rediscounts  131 

Drafts  drawn  by  cotton  growers,  accepted  by  a  Acceptances 

I  •  1     i  •  •    i  •  •        1   /»       '.  1        of  cooperative 

20operative  marketing  association  organized  for  the  marketing 
purpose  of  marketing  the  cotton  delivered  by  the  associations 
growers,  and  discounted  by  the  growers  at  their 
banks  may  be  eligible  for  rediscount  when  it  is 
shown  that  the  proceeds  of  the  accepted  drafts  have 
been  or  are  to  be  used  by  the  growers  for  agricul- 
tural purposes. 

(Ruling,  Federal   Reserve  Bulletin,  November,   1920,  page 
1177;  see  also  October,  1921,  page  1200.) 

The  nature  of  the  bill,  the  name  of  the  acceptor,  identification 
and  the  name  of  the  drawer  would  probably  indi-  "Jpe"'^"'*"'* 
cate  that  a  farmer  was  the  purchaser,  and  an  im- 
plement dealer,  the  seller  of  the  goods.  However, 
the  purchasing  member  bank  will  have  to  satisfy 
itself  in  some  satisfactory  way  that  the  bill  is  sub- 
stantially of  an  agricultural  character.  A  simple 
memorandum  attached  to  the  bill,  stating  that  the 
bill  was  drawn  in  payment  of  agricultural  imple- 
ments, signed  either  by  the  acceptor  or  the  drawer, 
would  probably  be  considered  sufficient  evidence 
by  the  member  bank  and  the  Federal  resei*ve  bank. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1916,  pages 
67,  68.) 

INELIGIBLE  AGRICULTURAL  PAPER 

The  bill  or  note  of  a  packing  company,  the  pro-  ^.f.*"/" 

ceeds  of  which  are  used  for  the  purchase  of  live  packing 

stock  which  is  slaughtered  upon  purchase,  is  not  <=»"P^"y 

"based  on  live  stock"  within  the  meaning  of  section 

13,  and  is,  therefore,  not  eligible  for  rediscount  if 

it  has  a  maturity  in  excess  of  ninety  days. 

(Opinion   of   Counsel,    Federal   Reserve    Bulletin,   August, 
1917,  page  616.) 

Where  the  proceeds  of  a  note  made  by  a  mer-  Pij^^hase 
chant  are  used  to  purchase  millet  seed  to  be  later  resale 


132 


Commercial     Banking     Practice 


Note  o( 

irrigation 

company 


Paper 
secured 
by  chattel 
mortgage 


Permanent 
or  fixed 
inrestments 


Purchase 
of  silos 


retailed  or  sold,  such  a  note  can  not  be  treated  a 
one  given  for  an  agricultural  purpose  and  can  no 
be  discounted  by  a  Federal  reserve  bank  if  it  ha 
a  maturity  at  time  of  discount  of  more  than  ninetj 
days. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  October? 
1916,  page  526.) 

A  note  of  an  irrigation  company  can  not  be 
classed  as  agricultural  paper  and  can  not  be  eligible 
for  discount  by  Federal  reserve  banks  if  it  has  a 
maturity  in  excess  of  ninety  days. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1921,  page  964.) 

A  promissory  note  even  though  secured  by  col- 
lateral notes  which  in  turn  are  secured  by  chattel 
mortgages  on  cattle  would  not  be  ehgible  for  redis- 
count by  a  Federal  reserve  bank  because  it  is  not 
drawn  for  an  agricultural,  industrial  or  commer- 
cial purpose. 

(Ruling,  Federal  Reserve  Bulletin,  September,  1917,  page 
691.) 

A  note  of  a  farmer  discounted  by  liim  at  his 
local  bank  to  provide  funds  with  which  to  purchase 
articles  for  agricultural  uses  is  inehgible  for  redis- 
count if  the  articles  are  in  the  nature  of  permanent 
or  fixed  investments. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1920,  page 
1302.) 

Silos  are  considered  to  be  permanent  or  fixed  im- 
provements, and  it  would  require  a  forced  construc- 
tion of  the  Act  to  treat  paper  given  for  their  pur- 
chase as  eligible  for  rediscount  as  agricultural 
paper. 

(Ruling,  Federal  Reserve  Bulletin,  October,  1918,  page 
971.) 


Rediscounts  138 

The  Board  has  ruled  upon  the  basis  of  facts  in  a  EJectnc 

particular  case  that  an  electric  system  for  furnish-  '^'*" 

ing  light  and  power  for  an  individual  farm  is  in  the 

nature  of  a  permanent  or  fixed  investment. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1920,  page 
1302.) 

AMOUNT  OF  PAPER  REDISCOUNTABLE  BY  A 
FEDERAL  RESERVE  BANK 

Statutory  Provisions 

Notes,  drafts,  and  bills  drawn  or  issued  for  agri-  '^/p'j*'"", 
Cultural  purposes  or  based  on  live  stock,  and  having  Reserve 
a  maturity  not  exceeding  six  months,  exclusive  of 
days  of  grace,  may  be  discounted  in  an  amount  to 
be  limited  to  a  percentage  of  the  assets  of  the 
Federal  reserve  bank,  to  be  ascertained  and  fixed 
by  the  Federal  Reserve  Board. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

The  law  prescribes  that  in  the  aggregate  the  total  ^"^^j!^ 
amount  of  agricultural  paper  purchased  by  a  Fed-  paper  redis- 
eral  reserve  bank  should  not  exceed  a  fixed  per-  rewrr^  ^  ^ 
centage  of  its  capital  stock,  to  be  fixed  from  time  ''^ 
to  time  for  each  Federal  reserve  bank  by  the  Fed- 
!  eral  Reserve  Board.    The  percentage  fixed  by  the 
I  Board  differs  in  the  various  districts.     Whenever 
1  a  district  has  applied,  the  maximum  limit  has  been 
'  granted,  which  has  been  considered  to  be  ninety- 
nine  per  cent,  of  the  capital  stock. 

(Ruling,   Federal   Reserve   Bulletin,   February,   1916,  page 
68.) 


For  other  provisions  governing  the  rediscount  of 
agricultural  paper, see  pages  97-106, 121-123,above. 


134 


Commercial     Banking     Practice 


Banker's 
acceptance 


Eligible 
acceptors 


Conditions 
of  negotiability 


Conditional 
bUI 


Rediscount  of  Bank  Acceptances 

DEFINITION 
Regulation  of  Federal  Reserve  Board 

A  banker's  acceptance  within  the  meaning  of  this 
regulation  is  defined  as  a  draft  or  bill  of  exchange, 
whether  payable  in  the  United  States  or  abroad  and 
whether  payable  in  dollars  or  some  other  money,  of 
which  the  acceptor  is  a  bank  or  trust  company,  or  a 
firm,  person,  company,  or  corporation  engaged  gen- 
erally in  the  business  of  granting  bankers'  accept- 
ance credits. 

(Regulation  A,  Series  of  1920,  B.) 

Opinions  and  Rulings 

The  question  of  determining  the  eligibility  of  an 
acceptor  under  the  regulation  is  left  to  the  discre- 
tion of  Federal  reserve  banks  themselves.  It  is,  of 
course,  understood  that  the  board  would  not  wish  to 
see  concerns  regarded  as  eligible  acceptors  which 
are  not  in  the  habit  of  carrying  on  some  acceptance 
business  regularly  and  are  not  generally  of  such 
character  and  standing  as  to  qualify  their  accept- 
ance as  a  "banker's  acceptance." 

(Ruling,  Federal  Reserve  Bulletin,  November,  1915,  page 
862.) 

A  bill  of  exchange,  in  order  to  be  negotiable, 
must  be  an  unconditional  order  to  pay,  on  demand 
or  at  a  fixed  or  determinable  future  time,  a  certain 
sum  of  money  to  order  or  to  bearer.  If  payment 
is  dependent  upon  the  happening  of  a  certain  con- 
tingency, the  bill  is  conditional  and  nonnegotiable. 
If  payment  is  confined  to  the  proceeds  of  a  particu- 
lar fund  and  is  not  chargeable  to  the  general  credit 
of  the  drawer,  the  bill  is  conditional  and  non- 
negotiable. 


Rediscounts  135 

A  general  acceptance  of  a  conditional  bill  or  a  Conditional 
[conditional    acceptance    of    an    unconditional    bill  ^"^p*^" 
makes  the  acceptance  a  conditional  one  and  de- 
stroys its  negotiability. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  May,  1915,. 
page  21.) 

ELIGIBLE  BANK  ACCEPTANCES 

Statutory  Provisions 

Any  Federal  reserve  bank  may  discount  accept-  Conditions 
ances  of  the  kinds  hereinafter  described,*  which  °Lj,yity 
have  a  maturity  at  the  time  of  discount  of  not  more 
than  three  months'  sight,  exclusive  of  days  of  grace, 
and  which  are  indorsed  by  at  least  one  member 
bank. 

(Federal  Reserve  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Board 

A  Federal  reserve  bank  may  discount  any 
.  .  .  .  [banker's  acceptance]  having  a  maturity 
at  time  of  discount  of  not  more  than  three  months, 
exclusive  of  days  of  grace,  which  has  been  drawn 
under  a  credit  opened  for  the  purpose  of  conducting 
or  settling  accounts  resulting  from  a  transaction  or 
transactions  involving  any  one  of  the  following: 

(1)  The  shipment  of  goods  between  the  United  Foreign 
States  and  any  foreign  country,  or  between  the  *  '' 
United  States  and  any  of  its  dependencies  or  insu- 
lar possessions,  or  between  foreign  countries.  A'VHiile 
it  is  not  necessary  that  shipping  documents  cover- 
ing goods  in  the  process  of  shipment  be  attached  to 
drafts  dra^\^l  for  the  purpose  of  financing  the  ex- 
portation or  importation  of  goods,  and  while  it  is 
not  essential,  therefore,  that  each  such  draft  cover 

*  See  Part  I,  "General  Statutory  Provisions,"  pages  9-10, 
above. 


136 


Commercial     Banking     Practice 


Documents 


Domestic 
shipments 


Storage 
of  staples 


specific  goods  actually  in  existence  at  the  time  of 
acceptance,  nevertheless  it  is  essential  as  a  prere- 
quisite to  eligibihty  either  (a)  that  shipping  docu- 
ments or  a  documentarj^  export  draft  be  attached 
at  the  time  the  draft  is  presented  for  acceptance,  or 
(b)  if  the  goods  covered  by  the  credit  have  not  been 
actually  shipped,  that  there  be  in  existence  a  spe- 
cific and  bona  fide  contract  providing  for  the  ex- 
portation or  importation  of  such  goods  at  or  within 
a  specified  and  reasonable  time  and  that  the  cus- 
tomer agree  that  the  accepting  bank  will  be  fur- 
nished in  due  course  with  shipping  documents  cov- 
ering such  goods  or  with  exchange  arising  out  of 
the  transaction  being  financed  by  the  credit.  A 
contract  between  principal  and  agent  will  not  be 
considered  a  bona  fide  contract  of  the  kind  required 
above,  nor  is  it  enough  that  there  be  a  contract 
providing  merely  that  the  proceeds  of  the  accept- 
ance will  be  used  only  to  finance  the  purchase  or 
shipment  of  goods  to  be  exported  or  imported. 

(2)  The  sliipment  of  goods  within  the  United 
States,  provided  shipping  documents  conveying 
security  title  are  attached  at  the  time  of  accept- 
ance, or 

(3)  The  storage  of  readily  marketable  staples,* 
provided  that  the  bill  is  secured  at  the  time  of  ac- 
ceptance by  a  warehouse,  terminal,  or  other  similar 
receipt,  conveying  security  title  to  such  staples,  is- 
sued by  a  party  independent  of  the  customer,  and 
provided  further  that  the  acceptor  remains  secured 

*A  readily  marketable  staple  within  the  meaning  of  these 
regulations  may  be  defined  as  an  article  of  commerce,  agricul- 
ture, or  industry  of  such  uses  as  to  make  it  the  subject  of  con- 
stant dealings  in  ready  markets  with  such  frequent  quotations 
of  price  as  to  make  (a)  the  price  easily  and  definitely  ascer- 
tainable and  (b)  the  staple  itself  easy  to  realize  upon  by  sale 
at  any  time.     [For  specific  rulings,  see  pages  43-45,  above.] 


Rediscounts  137 

throughout  the  life  of  the  acceptance.  In  the  event  withdrawal 
that  the  goods  must  be  withdrawn  from  storage  '"""""se 
prior  to  the  maturitj^  of  the  acceptance  or  the  re- 
tirement of  the  credit,  a  trust  receipt  or  other  simi- 
lar document  covering  the  goods  may  be  substi- 
tuted in  lieu  of  the  original  document,  provided 
that  such  substitution  is  conditioned  upon  a  reason- 
ably^ prompt  Hquidation  of  the  credit.  In  order  to 
insure  compliance  with  this  condition  it  should  be 
required,  when  the  original  document  is  released, 
either  (a)  that  the  proceeds  of  the  goods  will  be 
applied  within  a  specified  time  toward  a  liquidation 
of  the  acceptance  credit  or  (b)  that  a  new  docu- 
ment, similar  to  the  original  one,  will  be  resubsti- 
tuted  within  a  specified  time. 

A  Federal  reserve  bank  may  also  rediscount  any  Dollar 
bill  drawn  by  a  bank  or  banker  in  a  foreign  country  ^g^"^* 
or  dependency  or  insular  possession  of  the  United 
States  for  the  purpose  of  furnishing  dollar  ex- 
change, as  provided  in  regulation  C,  provided  that 
it  has  a  maturity  at  the  time  of  discount  of  not 
more  than  three  months,  exclusive  of  days  of  grace. 

(Regulation  A,  Series  of  1920,  B.) 

Opinions  and  Rulings 

The  term  "shipping  documents"  as  used  in  the 
regulation  includes  an  order  bill  of  lading  or  a 
straight  bill  of  lading,  whichever  is  issued  bj^  the 
carrier  in  the  particular  case,  but  does  not  include 
freight  receipts  or  mere  copies  of  original  bills  of 
ladinff.     The  purpose  of  the  requirement  that  the  „,.  . 

.  r       ir  ^   T.  _  _         _  Shipping 

accepting  bank  shall  be  furnished  with  shipping  documenu 
documents  is  not  merely  evidentiary,  but  is  also  to  finished 
put  the  accepting  bank  in  possession  of  the  original 
documents,  so  that  it  may  protect  itself  by  retaining  p      ^  ^j 
such  documents  until  it  is  put  in  funds  to  meet  the  requirement 


138  Commercial     Banking     Practice 

acceptance.  It  is  realized  that  this  protection  is 
not  always  absolute  and  that  the  protection  af- 
forded by  possession  of  a  straight  bill  of  lading  is 
not  so  great  as  that  afforded  by  possession  of  an 
order  bill  of  lading.  It  is  not  the  purpose  of  the 
Board,  however,  to  prescribe  the  type  of  bill  of 
lading  to  be  issued  in  the  particular  case,  but  only  1 
to  require  the  accepting  bank  to  be  furnished  with 
the  best  security  which  has  been  issued  by  the  car- 
rier in  the  particular  transaction.  ■ 

The  Board  rules,  therefore,  that  the  customer 
must  furnish  the  original  bills  of  lading  and  that 
the  requirement  of  the  regulation  will  not  be  satis- 
fied by  the  furnishing  of  freight  receipts  or  non- 
negotiable  copies  of  the  bills  of  lading.  This  does 
not,  however,  mean  that  the  bills  of  lading  must 
documL"!  necessarily  be  sent  to  the  accepting    bank.      The 

Board  has  ruled  in  connection  with  domestic  ac-  | 
ceptances  that  documents  are  legally  in  the  posses-  ' 
sion  of  the  accepting  bank  when  they  are  held  by 
its  correspondent,  or  by  some  other  independent 
party,  as  its  agent,  and  the  principle  of  this  ruling 
can  be  applied  in  dealing  with  the  shipping  docu- 
ments to  be  furnished  to  banks  accepting  drafts 
drawn  in  foreign  transactions. 

(Ruling,  Federal  Reserve  Bulletin,  February,   1921,  page 
191.) 

Exchange  Acccptauccs  drawu  to  finance  the  purchase  or 

trans-"'*  productiou  of  goods  under  contract  for  export  are 

»=*•«"*  eligible  for  rediscount  or  purchase  only  when  the 

customer  definitely  agrees  that  the  accepting  bank 
will  be  furnished  in  due  course  with  shipping  docu- 
ments covering  such  goods. 

The  furnishing  of  "exchange  arising  out  of  the 
transaction  being  financed  by  the  credit"  is  in- 


Rediscounts  189 

tended  as  an  alternative  to  the  furnishing  of  ship- 
ping dociunents  only  in  import  transactions. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1921,  page  71.) 

There  is  some  doubt  in  the  courts  whether  the  Reference  to 
mere  reference  to  a  particular  consignment  of  goods  [fa's'ed''on" 
makes  the  bill  conditional,  some  courts  stating  that  imports  or 
it  is  merely  an  indication  of  the  fund  out  of  which  ^^^ 
the  drawee  is  to  reimburse  himself;  other  courts 
holding  that  it  makes  the  bill  conditional  because 
limiting  payment  to  the  proceeds  of  the  particular 
shipment  referred  to.    There  is  no  doubt,  however, 
that  a  reference,  in  general  terms,  on  the  face  of 
an  accepted  bill  to  the  effect  that  it  is  based  on  the 
exportation   or  importation   of  goods   would   not 
make  it  conditional  and  nonnegotiable,  and  it  would 
not,  therefore,  be  ineligible  for  discount  under  the 
provisions  of  section  13  of  the  Federal  Reserve  Act. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  May,  1915, 
page  21.) 

Federal  reserve  banks  may,  under  the  provisions  AccepUnce* 
of  section  13,  discount  acceptances  based  on  the  im-  member  bLt  of 
portation  or  exportation  of  goods,  provided  they  another  district 
have  a  maturity  at  time  of  discount  of  not  more 
than  three  months,  and  provided,  further,  that  they 
are  indorsed  by  at  least  one  member  bank.  It  is  im- 
material whether  this  member  bank  is  located  in  the 
district  of  the  Federal  reserve  bank  which  is  mak- 
ing the  discount  or  in  any  other  district,  the  term 
"member  bank"   being  broad  enough  to  include 
member  banks  wherever  located. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  June,  1915, 
page  98.) 

The  Board  has  ruled  that  a  draft  drawn  by  an  shipment 
American  exporter  covering  cotton  consigned  to  ©ncon- 
his  European  agent  may  be  eligible  for  rediscount  «'sn™«n' 


140 


Commercial     Banking     Practice 


Based  on 
shipment 
of  cattie 


Warehouse 
receipts  of 
independent 
warehouses 


Foreign 

warehouse 

receipts 


when  shipping  documents  covering  goods  actually 
shipped  for  export  are  attached  at  the  time  the 
draft  is  presented  for  acceptance,  although  the 
goods  covered  by  the  documents  have  not  been  sold 
but  are  merely  shipped  on  consignment  to  the  ex- 
porter's agent  abroad. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1921,  page  419.) 

The  Board  has  ruled  that  a  national  bank  may 
accept  a  draft  draAvn  upon  it  if  secured  at  the  time 
of  acceptance  by  a  bill  of  lading  covering  a  ship- 
ment of  cattle  to  a  cattle  raiser  who  has  purchased 
them  with  the  intention  of  fattening  and  reselling 
them.  The  period  covered  by  the  acceptance,  how- 
ever, should  not  be  in  excess  of  the  period  of  credit 
which  is  usual  and  reasonably  necessary  to  finance 
transactions  of  this  character.  Such  acceptances 
when  discounted  and  indorsed  by  a  member  bank, 
other  than  the  accepting  bank,  are  eHgible  for  re- 
discount with  a  Federal  reserve  bank,  provided  they 
have  maturities  at  the  time  they  are  offered  for  re- 
discount not  in  excess  of  three  months  and  comply 
in  all  other  respects  with  the  provisions  of  the  Act 
and  the  regulations. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1921,  page  815.) 

In  purchasing  or  discounting  bankers'  accept- 
ances or  other  bills  wiiich  are  secured  by  warehouse 
receipts,  etc.,  the  Federal  reserve  banks  should 
make  sure  that  the  receipt  is  issued  by  a  warehouse 
which  is  independent  of  the  borrower. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1917,  page 
30.) 

A  draft  drawn  abroad,  payable  in  the  United 
States  in  dollars  and  secured  by  a  warehouse  receipt 
covering  readily  marketable  staples  stored  in  a 
warehouse  located  in  a  foreign  country,  is  eligible 


Rediscounts  141 

for  acceptance  by  a  member  bank,  and  after  ac- 
ceptance is  eligible  for  rediscount  by  a  Federal  re- 
serve bank. 

(Opinion    of    Counsel,    Federal    Reserve    Bulletin,    August, 
1919,  page  740.) 

A  draft  drawn  by  a  cooperative  marketing  asso-  Acceptances  for 
elation  against  negotiable  warehouse  receipts  cover-  a^SiTni 
ing  nonperishable  agricultural  commodities  to  which 
the  association  has  title  and  which  are  stored  in  inde- 
pendent warehouses  is  eligible  for  rediscount  after 
acceptance,  provided  it  complies  in  all  respects  with 
the  regulations. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1921,  page  963.) 

Acceptances  of  an  acceptance  corporation  ought  Paper  of 
to  be  dealt  with  exactly  as  would  be  the  acceptances  cS^Jation 
of  a  prime  private  banker.  These  acceptance  cor- 
porations are  in  the  same  relation  to  the  Federal 
Reserve  System  as  the  private  bankers.  They  can 
not  become  members,  but,  inasmuch  as  they  expect 
to  give  full  information  about  their  own  financial 
standing  and  the  nature  of  their  acceptances,  and 
as  they  exercise  a  most  important  function  for  the 
further  development  of  our  acceptance  business 
and  discount  market,  their  operation  ought  to  be 
encouraged  in  every  respect. 

(Ruling,  Federal  Reserve  Bulletin,  July,  1918,  page  635.) 

Although  the  Federal  reserve  banks  legally  may  Option  to 
rediscount  any  draft  which  section  13  authorizes  a  '®  """"* 
member  bank  to  accept,  nevertheless  such  reserve 
banks  are  not  required  by  law  to  rediscount  every 
such  acceptance  tendered  to  them  for  that  purpose, 
whether  or  not  it  is  secured  at  the  time  it  is  pre- 
sented for  rediscount. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1919,  page  253.) 


142 


Commercial     Banking     Practice 


Payment  for 
acceptance 
at  maturity 


The  discount  committee  of  the  Federal  Reserve 
Board  has  reported  that,  in  its  opinion,  "Federal 
reserve  banks  should  insist  that  acceptances  when 
due  should  be  paid  by  checks  on  the  local  Federal 
reserve  bank,  in  order  that  they  may  be  charged  to 
the  account  of  the  acceptor  on  the  day  of  maturity, 
or  else  that  acceptances  should  be  paid  by  checks 
through  the  clearings.  If  an  arrangement  on  these 
lines  can  not  be  perfected,  Federal  reserve  banks 
ought  to  be  required  to  add  one  day  to  the  actual 
number  of  days  the  acceptance  has  to  run  when 
bought,  so  as  to  make  up  for  the  loss  of  interest 
incurred  in  collecting  in  this  manner." 

This  report  has  been  agreed  to  by  the  Board,  and 
your  bank  is  requested,  in  buying  acceptances,  to 
charge  discount  for  one  additional  day,  except  in 
cases  where  satisfactory''  arrangements  are  made  to 
make  actual  cash  payment  at  the  Federal  reserve 
bank  on  the  day  of  maturity. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1918,  page  521.) 

For  additional  opinions  and  ruHngs  bearing  on 
this  subject,  see  Part  I,  "Bank  Acceptances,"  pages 
11-19,  32-37,  43-51,  53-57,  above. 


Acceptances 
for  dealers 
engaged  in 
export  and 
domestic 
sale 


INELIGIBLE   BANK   ACCEPTANCES 

Opinions  and  Rulings 

Acceptances  dra'vvn  to  finance  the  purchase  or 
production  of  goods  under  contract  for  export  ^vill 
no  longer  be  ehgible  for  rediscount  or  purchase  if 
the  customer  is  given  the  option  to  furnish  ware- 
house receipts  or  similar  documents  covering  goods 
not  intended  for  export,  and  thus  to  change  the 
nature  of  the  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  January,  1921,  page 
71.) 


Rediscounts  148 

The  acceptance  of  drafts  secured  by  bills  of  lad-  ^*^  "^ 

^       _  /  ,  proceeds 

ing  for  the  primary  purpose  of  providing  the  bor- 
rower with  working  capital  during  the  period  re- 
quired to  manufacture  and  resell  the  goods  covered 
by  the  bills  of  lading  is  an  abuse  of  the  domestic 
acceptance  privilege,  and  Federal  reserve  banks 
should  decline  to  rediscount  or  purchase  accept- 
ances made  for  such  purpose. 

(Ruling,  Federal  Reserve  Bulletin,  December,  1920,  page 
1301.) 

The  Board  is  of  the  opinion  that  a  draft  drawn  Rnance 
by  a  cotton  factor,  secured  at  the  time  of  acceptance 
by  a  warehouse  receipt  covering  cotton  consigned  to 
the  cotton  factor  for  the  purpose  of  sale,  where  it 
appears  that  the  proceeds  are  to  be  used  by  the 
factor  not  for  a  commercial  purpose  but  rather  for 
the  purpose  of  lending  to  his  customers,  is  not 
eligible  for  acceptance,  and  in  consequence  is  not 
eligible  for  rediscount  by  a  Federal  reserve  bank 
as  an  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1920,  page 
162.) 

National  banks  are  not  authorized  to  accept  bills  Chattel 
secured  by  chattel  mortgages  on  cattle,  and  Fed-  JJcunt^^ 
eral  reserve  banks  should  consider  as  ineligible  bills 
drawn  against  the  security  of  such  chattel  mort- 
gages, whether  accepted  by  member  or  nonmember 
banks. 

„      (Ruling,  Federal  Reserve  Bulletin,  April,  1918,  page  309.) 
I 

For  additional  opinions  and  ruhngs  bearing  on 
this  subject,  see  Part  I,  "Bank  Acceptances,"  pages 
11-19,  32-37,  43-51,  53-57,  above. 


144 


Commercial     Banking     Practice 


Evidence 

furnished 

Federal 

reserve 

bank 


EVIDENCE  OF  ELIGIBILITY 
Regulations  of  Federal  Reserve  Board 

A  Federal  reserve  bank  must  be  satisfied,  either 
by  reference  to  the  acceptance  itself,  or  otherwise, 
that  it  is  ehgible  for  rediscount.  The  bill  itself 
should  be  drawn  so  as  to  evidence  the  character  of 
the  underlying  transactions,  but  if  it  is  not  so 
drawn,  evidence  of  eligibility  may  consist  of  a  stamp 
or  certificate  affixed  by  the  acceptor  in  form  satis- 
factory^ to  the  Federal  reserve  bank.* 

(Regulation  A,  Series  of  1920,  B.) 

*  The  following  forms  of  the  certificates  referred  to  have 
been  approved  by  the  Federal  Reserve  Board  and  all  Federal 
reserve  banks: 


Underlying  Transaction 

Form  of  Certificate 

Domestic  Shipments : 

"At   time   of   acceptance,  this   bill  was 
accompanied     by     shipping    documents 
evidencing    the    domestic    shipment    of 
(name  of  commodity)    from    (point  of 
shipment)    to    (place   of   destination). 
(Name  of  Acceptor)" 

Import  and  Export 
Transactions : 

"This  acceptance  arises  out  of  a  transac- 

,   .        f  importation  )       .  , 
tionmvolvmg^^^/^^^^^.^^    [    of  (nam. 

of  commodity)  from  (point  of  ship- 
ment)   to    (place   of   destination). 

(Name  of  Acceptor)" 

Warehouse  Secured 
Credit: 

"This  bill  was  secured  at  the  time  of 
acceptance  by  independent  warehouse, 
terminal,  or  other  similar  receipt  con- 
veying security  title  to  (name  of  readr- 
ily  marketable  staple)  stored  in  (coun- 
try where  stored)  and  the  acceptor 
will  remain  secured  throughout  the  life 
of  the  bill.        ^^gj^g  ^f  Acceptor)" 

(Circular  No.  355,  Federal  Reserve  Bank  of  New  York.) 
When  drafts  drawn  for  the  purpose  of  furnishing  dollar 
exchange  are  accepted,  they  are  customarily  stamped  as 
follows:  "This  draft  is  accepted  under  authority  of  the 
Federal  Reserve  Board  for  the  purpose  of  creating  dollar 
exchange.  (Name  of  Acceptor)" 


Rediscounts  145 

Opinions  and  Rulings 

The  Federal  reserve  bank  reserves  the  right  to  Reqiuremeni 
ask  State  member  banks  for  evidence  underlying  evidence 
the  certification  given  to  it,  and  the  bank  examiner 
may  require  evidence  from  the  national  bank. 
IMember  banks  would,  therefore,  best  protect  them- 
selves by  stipulating  for  themselves  the  right  at 
times  to  ask  for  substantiation  of  the  assurances 
given  by  their  customers. 

(Ruling,  Federal  Reserve  Bulletin,  December,   1915,  page 
4-06.) 

MATURITY 

Statutory  Provisions 

Any  Federal  reserve  bank  may  discount  accept-  Three  months 
ances    .    .    .  which  have  a  maturity  at  the  time  of 
discount  of  not  more  than  three  months'  sight,  ex- 
clusive of  days  of  grace. 

(Federal  Reserve  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Board 

Although  a  Federal  reserve  bank  may  legally  re-  Maturity 
discount  an  acceptance  having  a  maturity  at  the 
time  of  discount  of  not  more  than  three  months,  ex- 
clusive of  days  of  grace,  it  may  decline  to  rediscount 
any  acceptance  the  maturity  of  which  is  in  excess  Customary 
of  the  usual  or  customary  period  of  credit  required  ?«""><' 
to  finance  the  underlying  transaction  or  which  is  in 
excess  of  that  period  reasonably  necessary  to 
finance  such  transactions.  Since  the  purpose  of 
permitting  the  acceptance  of  drafts  secured  by 
warehouse  receipts  or  other  such  documents  is  to 
permit  of  the  temporary  holding  of  readily  market- 
able staples  in  storage  pending  a  reasonably  prompt 
sale,  shipment,  or  distribution,  no  such  acceptance 
should  have  a  maturity  in  excess  of  the  time  ordi- 
narily necessary  to  effect  a  reasonably  prompt  sale, 


146 


Term 
of  credit 
agreement 


Commercial     Banking     Practice 


I 


Renewals 


Acceptances 
in  excess 
of  10 
per  cent. 


shipment,  or  distribution  into  the  process  of  manu- 
facture or  consumption. 

While  a  national  bank  may  properly  enter  into  an 
agreement  having  more  than  six  months  to  run  by 
which  it  obhgates  itself  to  accept  drafts  of  the  kinds 
described  in  ...  .  [section  13*],  each  individual 
draft  accepted  under  the  terms  of  that  agreement 
must,  in  order  to  be  ehgible,  conform  in  all  respects 
to  the  provisions  of  the  law  and  these  regulations. 
Inasmuch  as  each  individual  acceptance  must  itself 
conform  to  the  terms  of  the  law,  no  renewal  draft, 
whether  or  not  contracted  for  in  advance,  can  be 
eligible  if  at  the  time  of  its  acceptance  the  period 
required  for  the  conclusion  of  the  transaction  out  of 
which  the  original  draft  was  drawn  shall  have 
elapsed.  The  question  of  the  eligibility  of  renewal 
drafts,  therefore,  must  necessarily  depend  upon  the 
stage  of  the  transaction  at  the  time  the  renewal 
drafts  are  drawn. 

(Regulation  A,  Series  of   1920,  B.) 

AMOUNT  OF  PAPER  OF  ONE  INTEREST  REDIS- 
COUNTABLE  FOR  ONE  MEMBER  BANK 

Regulations  of  the  Federed  Reserve  Board 

In  order  to  be  eligible,  acceptances  for  any  one 
customer  in  excess  of  ten  per  cent,  of  the  capital  and 
surplus  of  the  accepting  bank  must  remain  actually 
secured  throughout  the  life  of  the  acceptance.  In 
the  case  of  acceptances  of  member  banks  this  secur- 
ity must  consist  of  shipping  documents,  warehouse 
receipts  or  other  such  documents,  or  some  other 
actual  security  growing  out  of  the  same  transaction 
as  the  acceptance,  such  as  documentary  drafts,  trade 
acceptances,   terminal   receipts,    or   trust   receipts 

*  For  Section  13,  see  pages  9-10,  above. 


Rediscounts  14,7 

which  cover  goods  of  such  a  character  as  to  insure 
at  all  times  a  continuance  of  an  effective  and  lawful 
lien  in  favor  of  the  accepting  bank.  Other  trust 
receipts  are  not  secured  within  the  meaning  of  this 
paragraph  if  they  permit  the  customer  to  have  ac- 
cess to  or  control  over  the  goods. 
(Regulation  A,  Series  of  1920,  B.) 

See  also  "Rediscount  of  Promissory  Notes," 
pages  97-103,  above. 

INDORSEMENT 

Statutory  Provisions 

Any  Federal  reserve  bank  may  discount  accept-  Member  bank 
ances  .  .  .  which  are  indorsed  by  at  least  one  mem- 
ber bank. 

(Federal  Reserve  Act,   Section   13.) 

Opinions  and  Rulings 

If  the  acceptance  is  indorsed  in  blank  it  can  of  indorsement 
course  change  ownership  from  one  holder  to  an-  " 
other  Avithout  being  indorsed  by  each  subsequent 
holder,  and  the  title  would  pass. 

The  Board  expresses  the  hope  that  we  may  soon 
reach  the  point  when  Federal  reserve  banks  can 
make  a  definite  rule  not  to  buy  bankers'  acceptances 
except  such  as  bear  three  responsible  signatures, 
being  those  of  the  acceptor,  the  drawer,  and  the 
indorser. 

(Ruling,  Federal  Reserve  Bulletin,  August,  1918,  page 
744.) 

It  appears  that  some  national  banks,  in  considera-  Accommoda- 
tion of  a  fee  or  commission,  are  accustomed  to  in-  |IId"„ement 
dorse  acceptances  for  the  accommodation  of  their 
customers  or  bill  brokers.     Whether  or  not  a  na- 
tional bank  has  authority  to  indorse  an  acceptance 


148  Commercial     Banking     Practice 

for  accommodation  is  a  question  of  law  which  in  the 
last  analysis  must  be  determined  by  the  courts.  The 
Federal  Reserve  Board  is  of  the  opinion  that  a  na- 
tional bank  has  no  authority  to  indorse  an  accept- 
ance for  accommodation,  and  that  such  act  is  ultra 
vires. 

However,  a  national  bank  may  purchase  an  ac- 
ceptance and  immediately  resell  it  with  its  indorse- 
ment, since  the  power  to  indorse  acceptances  is  in- 
cidental to  the  power  to  negotiate  acceptances. 
There  appears  to  be  no  authority  of  law  which  per- 
mits a  national  bank  to  lend  its  credit  by  indorsing 
an  acceptance  where  the  transaction  does  not  in- 
volve an  actual  transfer  of  title  to  and  from  the 
national  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  May,  1921, 
page  547.) 


For  other  provisions  governing  the  rediscount  of 
bank  acceptances,  see  pages  103-106,  above. 


PART  III. 

Advances  by 
Federal  Reserve  Banks 

General  Statutory  Provisions 

Any  Federal  reserve  bank  may  make  advances  Maturity 
to  its  member  banks  on  their  promissory  notes  for 
a  period  not  exceeding  fifteen  daj^s  at  rates  to  be 
established  by  such  Federal  reserve  banks,  subject 
to  the  review  and  determination  of  the  Federal  Re- 
serve Board,  provided  such  promissory  notes  are 
secured  by  such  notes,  drafts,  bills  of  exchange,  or  Security 
bankers'  acceptances  as  are  eligible  for  rediscount 
or  for  purchase  by  Federal  reserve  banks  under  the     's^^p^p^' 
provisions  of  this  Act,  or  by  the  deposit  or  pledge  United  states 
of  bonds  or  notes  of  the  United  States.  obligations 

(Federal  Reserve  Act,  Section  13.) 

The  Federal  reserve  banks  shall  be  authorized,  War 
subject  to  the  maturity  limitations  of  the  Federal  Corporation 
Reserve  Act  and  to  regulations  of  the  Federal  Re-  ^""^^ 
serve  Board,  to  discount  the  direct  obligations  of 
member  banks  secured  by  .  .  .  bonds  of  the  [War 
Finance]   Corporation    .    .    .    Xo  discount  or  re- 
discount under  this  section  shall  be  granted  at  a  less 
interest  charge  than  one  per  centum  per  annum 
above  the  prevailing  rates  for  eligible  commercial 
paper  of  corresponding  maturity. 

(War  Finance  Corporation  Act,  Section  13.) 

General  Regulations  of  Federal  Reserve  Board 

Any  Federal  reserve  bank  may  make  advances  to 
its  member  banks  on  their  promissory  notes  for  a 


150 


Commercial     Banking     Practice 


Security 


Indorsement 

of 

collateral 


Preferential 
rate ;  collateral 
of  war 
bonds 


Discretion  of 


reserve 
bank 


period  not  exceeding  fifteen  days,  provided  that  they 
are  secured  by  notes,  drafts,  bills  of  exchange,  or 
bankers'  acceptances  which  are  eligible  for  redis- 
count or  for  purchase  by  Federal  reserve  banks,  or 
by  the  deposit  or  pledge  of  bonds  or  notes  of  the 
United  States,  or  bonds  of  the  War  Finance  Cor- 
poration. 

(Regulation  A,  Series  of   1920,  A,  I.) 

For  conditions  of  eligibility  of  notes,  drafts,  and 
acceptances,  see  pages  77-87,  113-118,  126-131, 
135-142,  above,  and  153-158,  below. 

Security 
Opinions  and  Rulings 

Eligible  paper  pledged  as  security  for  a  promis- 
sory note  of  a  member  bank  on  which  an  advance 
is  being  made  by  a  Federal  reserve  bank  need  not 
be  indorsed  by  such  member  bank  if  such  eligible 
paper  is  already  in  negotiable  form. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1916,  page  685.) 

The  Federal  Reserve  Board  may,  under  the  terms 
of  section  14  of  the  Federal  Reserve  Act,  approve 
a  preferential  rate  of  discount  upon  member  bank 
notes  secured  by  certificates  of  indebtedness  of  the 
United  States,  by  Liberty  bonds,  or  by  Victory 
notes.  A  Federal  reserve  bank,  in  the  exercise  of  its 
discretion,  may  decline  to  make  an  advance  upon 
such  a  note  of  a  member  bank  unless  the  certificates 
of  indebtedness.  Liberty  bonds,  or  Victory  notes 
pledged  as  security  are  actually  o^vned  by  the  mem- 
ber bank  and  unless  the  Government  deposit  of  such 
bank,  if  any,  is  secured  by  certificates  of  indebted- 
ness. Liberty  bonds,  or  Victory  notes  actually 
owned  by  it. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  February, 
1920,  page  163.) 


Advances    by    Federal    Reserve    Banks  161 

IMember  banks  in  procuring  advances  from  Fed-  County 

^  .     "  warrants 

era!  reserve  banks  on  promissory  notes  must  secure  ineligible 

such  notes  by  paper  eligible  for  rediscount  or  for 

purchase  by  Federal  reserve  banks  or  by  bonds  or 

notes  of  the  United  States.     County  warrants  are 

not  ehgible  as  security. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  November, 
1916,  page  609.) 

Farm  loan  bonds  are  issued  bv  Federal  farm  land  Farm  loan 

!  banks  incorporated  under  Federal  law,  and  are  not  indi^bie 

obligations  of  the  United  States,  so  that  they  are 

not  eligible  as  collateral  for  promissory  notes  of 

member  banks. 

(Opinion  of  Counsel,  Federal   Reserve  Bulletin,  January, 
1918,  page  33.) 

Maturity 
Statutory  Provisions 

Any  Federal  reserve  bank  maj^  make  advances  to  Fifteen  days 
its  member  banks  on  their  promissory  notes  for 
periods  not  exceeding  fifteen  days. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

If  by  reason  of  a  State  law  paper  falling  due  on  Notes  due  on  Sunday 
Saturday  or  Sunday  must  be  collected  one  or  two  °^  ^^^   **'  ^^ 
days  before  its  apparent  maturity  or  one  or  two 
days   thereafter,   interest    should   be    charged   ac- 
cordingly. 

(Ruling,  Federal  Reserve  Bulletin,  February,   1918,  page 
108.) 

A  Federal  reserve  bank  may  properly  renew  the  ^^^^^ 
fifteen-day  notes  of  its  member  banks  if  properly  se- 
cured, provided  that  the  Federal  reserve  bank  does 


162  Commercial     Banking     Practice 

not  obligate  itself  in  advance  to  make  any  such 
renewal. 

(Opinion   of   Counsel,   Federal   Reserve   Bulletin,   October, 
1917,  page  765.) 

Renewals  not  Wliilc  the  Federal  Reserve  Board  does  not  wish 

encourage  ^^  prohibit  the  rcncwal  of  fifteen-day  notes,  it  feels 

that  renewals  should  be  the  exception  rather  than 

the  rule. 

(Ruling,  Federal  Reserve  Bulletin,  November,   1917,  page 
879.) 


PART  IV. 

Open  Market  Transactions 

General  Statutory  Provisions 

Any  Federal  reserve  bank  may,  under  rules  and  Cable 
regulations    prescribed    by    the    Federal    Reserve  acwptances, 
Board,  purchase  and  sell  in  the  open  market,  at  ^ndbuu 
home  or  abroad,  either  from  or  to  domestic  or  for- 
eign banks,  firms,  corporations,  or  individuals,  cable 
transfers  and  bankers'  acceptances  and  bills  of  ex- 
change of  the  kinds  and  maturities  by  this  Act  made 
eligible  for  rediscount,  with  or  without  the  indorse- 
ment of  a  member  bank. 

Every  Federal  reserve  bank  shall  have  power  Commercial 
...   to  purchase  from  member  banks  and  to  sell,    '  * 
with  or  without  its  indorsement,  bills  of  exchange 
arising  out  of  commercial  transactions,  as  herein- 
before defined. 

(Federal  Reserve  Act,  Section  14.) 

Such  drafts  or  bills  [to  provide  dollar  exchanffel  Doi'ar 

_-_  czj    -■    exch3,nj?6 

may  be  acquired  by  Federal  reserve  banks  in  such  bills 
amounts  and  subject  to  such  regulations,  restric- 
tions, and  limitations  as  may  be  prescribed  by  the 
Federal  Reserve  Board. 

(Federal  Reserve  Act,  Section  13.) 

General  Regulations  and  Rulings 

Regulations  of  Federal  Reserve  Board 

The  Federal  Reserve  Board,  exercising  its  statu-  Conditions 
tory  right  to  regulate  the  purchase  of  bills  of  fJ-gS/ 
exchange  and  acceptances,  has  determined  that  a 


154 


Commercial     Banking     Practice 


Prior 
acceptance 


Six  months' 
foreign 
trade 
bilU 


Goods  under 
contract  of 
sale 


Purpose 
of  new 
regulation 


bill  of  exchange  or  acceptance,  to  be  eligible  for 
purchase  by  Federal  reserve  banks  under  this  pro- 
vision of  section  14,  must  have  been  accepted  by 
the  drawee  prior  to  such  purchase  unless  it  is  either 
accompanied  or  secured  by  shipping  documents  or 
by  warehouse,  terminal,  or  other  similar  receipt 
conveying  security  title  or  bears  a  satisfactory  bank- 
ing indorsement,  and  must  conform  to  the  relative 
requirements  of  Regulation  A,*  except  that — 

(a)  A  banker's  acceptance  growing  out  of  a 
transaction  involving  the  importation  or  exporta- 
tion of  goods  may  be  purchased  if  it  has  a  maturity 
not  in  excess  of  six  months,  exclusive  of  days  of 
grace,  provided  that  it  conforms  in  other  respects 
to  the  relative  requirements  of  Regulation  A,*  and 

(b)  A  banker's  acceptance  growing  out  of  a 
transaction  involving  the  storage  within  the  United 
States  of  goods  actually  under  contract  for  sale  and 
not  yet  dehvered  or  paid  for  may  be  purchased, 
provided  that  the  acceptor  is  secured  by  the  pledge 
of  such  goods;  and  provided  further  that  the  ac- 
ceptance conforms  in  other  respects  to  the  relative 
requirements  of  Regulation  A.* 

(Regulation  B,  Series  of  1921,  II.) 

Announcements  of  Federal  Reserve  Board 

The  new  regulation  is  issued  primarily  for  the 
purpose  of  permitting  Federal  reserve  banks  until 
further  notice  to  purchase  in  the  open  market  bank- 
ers' acceptances  with  maturities  not  in  excess  of  six 
months,  which  grow  out  of  transactions  involving 
the  importation  or  exportation  of  goods. 


*  For  requirements  with  respect  to  bills  of  exchange  and 
trade  acceptances,  see  pages  107-121,  above;  with  respect  to 
bank  acceptances,  see  pages  134-146,  above. 


Open     Market     Transactions  155 

Two  considerations  have  led  the  Board  to  take 
;his  action:  (1)  The  desire  to  widen  the  accep-  ^2^" 
;ance  market  by  meeting  the  wants  of  savings  banks 
md  similar  purchasers  of  bankers'  acceptances  who 
ire  now  deterred  from  investing  in  acceptances  of 
-onger  than  three  months'  maturity,  because  of  the 
lack  of  authority  of  Federal  reserve  banks  to  pur- 
chase longer  maturities  up  to  six  months;  (2)  to  Foreign 
provide  more  ample  facilities  for  financing  import  ^*'*® 
and  export  trade  with  countries  where  either  normal 
conditions  or  present  abnormal  conditions  indicate 
the  desirability  of  rendering  assistance  by  making 
acceptances  of  maturities  not  exceeding  six  months 
eligible  for  purchase  by  Federal  reserv^e  banks. 
While  the  Federal  reserve  banks  would,  under  or- 
dinarj^  conditions,  prefer  to  confine  their  invest- 
ments to  paper  of  short  maturity,  that  is,  not  ex- 
ceeding three  months,  it  is  believed  that  the  present 
emergency  in  the  foreign  trade  situation  would  be 
relieved  by  a  more  hberal  practice.  Vigilant  care, 
however,  should  be  exercised  by  Federal  reserve 
banks  in  purchasing  acceptances  of  long  maturities, 
in  order  that  the  liquidity  of  the  aggregate  invest- 
ment in  acceptances  held  by  them  should  not  be 
I  affected.  In  amending  its  regulation  in  the  manner 
I  described,  the  Board  looks  to  the  good  banking 
judgment  and  discretion  of  the  accepting  banks  and 
of  the  Federal  reserve  banks  to  avoid  any  un- 
toward results.  To  avoid  misunderstanding,  the 
Board  desires  to  add  that  the  results  of  this  widen- 
ing of  the  investment  powers  of  the  Federal  reserve 
banks  vdM  be  followed  closety,  with  a  view  to  such 
modification  of  its  rules  or  amendment  of  its  regu- 
lations as  future  developments  may  indicate  to  be 
necessary. 


156 


Commercial     Banking     Practic 


Acceptances 
against 
goods 
stored 


Promissory 

notes 

excluded 


Eligible  paper 


Discretion  of 

reserve 

banks 


The  Board  has  also  taken  this  occasion  to  make 
another  shght  amendment  to  Regulation  B  so  that 
its  terms  will  more  clearly  indicate  the  Board's  pur- 
pose in  permitting  Federal  reserve  banks  to  pur- 
chase in  the  open  market  bankers'  acceptances  grow- 
ing out  of  the  domestic  storage  of  goods  other  than 
readily  marketable  staples. 

(Announcement,  Federal  Reserve  Bulletin^  ^lay,  1921,  page 
545.) 

Opinions  and  Rulings 

The  original  bill  for  the  estabhslmient  of  Federal 
reserve  banks  permitted  the  purchase  in  the  open 
market  of  "notes,  drafts,  and  bills  of  exchange," 
but  in  the  bill  as  finally  enacted  the  words  "notes 
and  drafts"  were  stricken  out  in  section  14,  al- 
though they  are  retained  in  section  13.  The  Board 
has  reached  the  conclusion,  in  which  it  is  sustained 
by  opinion  of  counsel,  that  Congress  drew  a  dis- 
tinction in  sections  13  and  14  between  the  several 
forms  of  commercial  paper,  and  that  promissor}^ 
notes,  even  though  bearing  an  additional  indorse- 
ment, must  be  regarded  as  excluded  from  open  mar- 
ket purchases  under  section  14. 

There  remain,  then,  as  eligible  for  purchase  under 
this  section,  "cable  transfers"  and  "bills  of  ex- 
change" of  two  kinds:  (1)  so-called  foreign  bills 
of  exchange;  and  (2)  domestic  acceptances  drawn 
by  one  party  on  another,  as  by  a  seller  of  goods 
upon  the  purchaser,  such  as  have  been  classified  by 
the  Board  as  trade  acceptances  either  accepted  or 
not  accepted  at  the  time  of  purchase. 

The  decision  whether  Federal  reserve  banks 
should  engage  in  such  open  market  operations  rests 
entirely  with  them  and  not  with  the  Federal  Reserve 
Board. 


I 


Open     Market     Transactions  157 

Any  Federal  reserve  bank  may,  under  the  pro-  Promissory  notes 
risions  of  section  14  of  the  Federal  Reserve  Act, 
>urchase  acceptances  and  bills  of  exchange  of  cer- 
'tain  kinds  and  maturities  in  the  open  market;  but 
promissory  notes  as  distinguished  from  bills  of  ex- 
change, whether  one  or  more  names,  are  not  ehgible 
for  such  purchase. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  November, 
1915,  page  365.) 

The  purchase  of  commodity  loans  from  member  Commodity  paper 
banks  without  their  indorsement  would  not  come 
within  the  provisions  of  the  law  unless  there  is  two- 
name   commodity   paper    or    such    paper    can    be 
created  in  connection  with  commodity  loans. 

(Ruling,  Federal  Reserve  Bulletin,  December,   1915,  page 
406.) 

Eligible  Bills  and  Acceptances 

Opinions  and  Rulings 

Gold  bars  may  be  properly  considered  as  goods,  Bullion 
and  accordingly  sixty-day  bills  when  accepted  by  ^'"p™^"'' 
banks  and  bankers  against  such  shipment  would  be 
eligible  for  purchase  by  Federal  reserve  banks  as 
based  upon  or  involving  the  exportation  of  goods. 

(Ruling,    Federal    Reserve    Bulletin,    January,    1917,    page 
29.) 

Gold  coin  is  "goods"  within  the  meaning  of  sec-  Coin 
tion  13  of  the  Federal  Reserve  Act;  and,  therefore,  '''''""'"*' 
a  bill  of  exchange  drawn  to  finance  a  shipment  of 
gold  coin  from  this  country  is  eligible  for  purchase 
by  a  Federal  reserve  bank  if  otherwise  in  conform- 
ity with  the  provisions  of  the  law  and  the  regulations 
of  the  Federal  Reserve  Board. 

(Ruling,    Federal    Reserve   Bulletin,    January,    1917,   page 
29.) 


158 


Commercial     Banking     Practice 


Goods 
consigned 
to  foreign 
agents 


The  Board  is  of  the  opinion  that  acceptances 
drawn  against  commodities  shipped  to  foreign  coun- 
tries, to  be  held  on  consignment  by  the  shippers' 
agents  until  sales  have  been  effected  are  technically 
eligible  for  purchase  in  the  open  market,  provided 
that  the  goods  are  actually  shipped  for  export  and 
shipping  documents  covering  such  goods  are  at- 
tached to  the  draft  at  the  time  it  is  presented  for 
acceptance,  and  provided  that  in  other  respects  the 
drafts  comply  with  the  law  and  the  Board's  regu- 
lations governing  open-market  operations. 

Although  such  acceptances  are  technically  eligi- 
ble for  purchase,  the  Federal  reserve  bank,  before 
purchasing  the  acceptances,  should  be  reasonably 
sure  that  the  goods  will  be  sold  before  the  maturity 
of  such  acceptances,  for  the  use  of  acceptances  is 
proper  only  where  it  is  anticipated  at  the  time  the 
acceptances  are  drawn  that  they  will  be  liquidated 
out  of  the  proceeds  derived  from  the  sale  of  the, 
goods  under  the  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  April,  1921,  page  419.) 

For  additional  rulings,  see  Part  II,  "Rediscounts 
with  Federal  Reserve  Bank,"  pages  113-118  and 
135-142,  above. 


Acceptances 
not  based 
on  sales  and 
not  secured 


Ineligible  Bills  and  Acceptances 
Opinions  and  Rulings 

Acceptances  drawn  by  a  manufacturer  on  and 
accepted  by  a  trust  company  not  a  member  of  the 
Federal  Reserve  System,  the  proceeds  of  which  are 
to  be  used  for  purchases  of  raw  material  and  pay- 
ment for  labor  where  the  goods  had  not  been  sold 
and  no  warehouse  receipts  or  other  instruments 


I 


Open     Market     Transactions  159 

could  be  furnished,  are  held  not  to  be  eligible  for 

purchase  by  a  Federal  reserve  bank. 

(Ruling,  Federal  Reserve  Bulletin,  February,  1916,  page 
66.) 

A  banker's  acceptance  dra-^n  for  the  purpose  of  Acceptances 
purchasing  goods  secured  by  a  bill  of  sale  of  stock  bauf^aie^ 
in  hand  is  not  ehgible  for  purchase  by  Federal  re- 
serve banks. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  December, 
1916,  page  684.) 

The  fact  that  a  land  company  has  stamped  a  bill  ^^^'"p  "^^^^^ 

,    ,  .  ,  ,  Acceptance 

a  trade  acceptance  and  has  signed  such  statement  hasnoyaiue 
as  "acceptor"  does  not  in  itself  make  it  a  trade  ac- 
ceptance.    The  bill  was  accepted  by  a  bank  and 
not  by  the  land  company  and  is  therefore  not  ehgi- 
ble for  purchase  as  a  trade  acceptance. 

(Ruling,  Federal  Reserve  Bulletin,  March,  1916,  page  112.) 

An  instrument  in  the  form  of  a  bill  of  exchange,  Draft 
drawn  by  an  agent  of  a  corporation  upon  the  cor-  ^r^a°tjl,n 
poration  itself,  is  not  a  bill  of  exchange  such  as  is  by  agent 
■  ehgible  for  purchase  in  the  open  market  by  Federal 
reserve  banks. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  September, 
1916,  page  462.) 

For  additional  rulings,  see  Part  II,  "Rediscounts 
with  Federal  Reserv^e  Banks,"  pages  118-120  and 
142-143,  above. 

Requirement  of  Statements 
Regrulations  of  Federal  Reserve  Board 

A  bill  of  exchange,  unless  indorsed  by  a  member  eais  of 
bank,  is  not  eligible  for  purchase  until  a  satisfac-  ^^^^^^^^ 
tory  statement  has  been  furnished  of  the  financial 
condition  of  one  or  more  of  the  parties  thereto. 


160 


Commercial     Banking     Practice 


Bank 
acceptances 


A  banker's  acceptance,  unless  accepted  or  in- 
dorsed by  a  member  bank,  is  not  eligible  for  pur- 
chase until  the  acceptor  has  furnished  a  satisfactory 
statement  of  its  financial  condition  in  form  to  be 
approved  by  the  Federal  reserve  bank  and  has 
agreed  in  writing  with  a  Federal  reserve  bank  to 
inform  it  upon  request  concerning  the  transaction 
underlying  the  acceptance. 

(Regulation  B,  Series  of  1921,  III.) 


Maturity 
as  for 
rediscounts 


Exception 


Maturity 
Statutory  Provisions 

Any  Federal  reserve  bank  may  .  .  .  purchase 
and  sell  .  .  .  cable  transfers  and  bankers'  accept- 
ances and  bills  of  exchange  of  the  kinds  and  ma- 
turies  by  this  Act  made  eligible  for  rediscount. 

Every  Federal  reserve  bank  shall  have  power 
...  to  purchase  from  member  banks  and  to 
sell  .  .  .  bills  of  exchange  arising  out  of  com- 
mercial transactions. 

(Federal  Reserve  Act,  Section  14.) 

Regulations  of  Federal  Reserve  Board 

The  Federal  Reserve  Board,  exercising  its  statu- 
tory right  to  regulate  the  purchase  of  bills  of 
exchange  and  acceptances,  has  determined  that  a 
bill  of  exchange  or  acceptance,  to  be  eligible  for 
purchase  by  Federal  reserve  banks  .  .  .  must  con- 
form to  the  relative  requirements  of  Regulation 
A,*  except  that — 

A  banker's  acceptance  growing  out  of  a  trans- 
action involving  the  importation  or  exportation  of 

*See  Part  II,  "Rediscounts  with  Federal  Reserve  Banks," 
pages  121  and  145-146,  above. 


Open     Market     Transactions  161 

goods  may  be  purchased  if  it  has  a  maturity  not  in 
excess  of  six  months,  exclusive  of  days  of  gi'ace. 
(Regulation  B,  Series  of  1921,  II.) 

Indorsement 
Statutory  Provisions 

Any  Federal  reserve  bank  may  .  .  .  purchase 
and  sell  .  .  .  cable  transfers  and  bankers'  accept- 
ances and  bills  of  exchange  .  .  .  with  or  without 
the  indorsement  of  a  member  bank. 

Every  Federal  reserve  bank  shall  have  power 
....  to  purchase  from  member  banks  and  to 
sell  ....  bills  of  exchange  arising  out  of  com- 
mercial transactions. 

(Federal  Reserve  Act,  Section  14.) 

Opinions  and  Rulings 

It  appears  that  some  national  banks,  in  con-  Accommodation 
sideration  of  a  fee  or  commission,  are  accustomed  *"  °"^™^" 
to  indorse  acceptances  for  the  accommodation  of 
their  customers  or  bill  brokers.  Whether  or  not  a 
national  bank  has  authority  to  indorse  an  accept- 
ance for  accommodation  is  a  question  of  law  which 
in  the  last  analysis  must  be  determined  by  the 
courts.  The  Federal  Reserve  Board  is  of  the 
opinion  that  a  national  bank  has  no  authority  to 
indorse  an  acceptance  for  accommodation,  and  that 
such  act  is  ultra  vires. 

However,  a  national  bank  may  purchase  an  ac- 
ceptance and  immediately  resell  it  with  its  indorse- 
ment, since  the  power  to  indorse  acceptances  is 
incidental  to  the  power  to  negotiate  acceptances. 
There  appears  to  be  no  authority  of  law  which  per- 
mits a  national  bank  to  lend  its  credit  by  indorsing 


162 


Commercial     Banking     Practice 


Purchase 

from 

acceptor 


Use  of 
commercial 
paper  rate 


an  acceptance  where  the  transaction  does  not  in- 
volve an  actual  transfer  of  title  to  and  from  the 
national  bank. 

(Opinion  of  Counsel,  Federal  Reserve  Bulletin,  May,  1921, 
page  547.) 

A  Federal  reserve  bank  technically  has  author- 
ity to  purchase  from  the  drawer,  or  even  from  the 
accepting  bank,  a  banker's  acceptance  which  bears 
no  indorsement  other  than  that  of  the  accepting 
bank. 

The  normal  and  desirable  practice,  however,  is 
for  the  drawer  to  discount  acceptances  with  some 
bank  other  than  the  accepting  bank,  rather  than 
for  the  accepting  bank  to  discount  the  acceptances. 
In  view,  however,  of  the  fact  that  the  acceptance 
business  is  comparatively^  new  in  this  country,  and 
in  view  of  the  consequent  lack  of  an  adequate  open 
market  for  bankers'  acceptances  in  some  districts, 
it  has  seemed  best  for  some  of  the  Federal  reserve 
banks  to  purchase  acceptances  direct  from  the  ac- 
cepting banks,  in  the  hope  that  the  proper  use  of, 
and  an  active  market  for,  bankers'  acceptances  may 
thereby  be  encouraged. 

It  is,  nevertheless,  apparent  that  the  indorsement 
of  the  accepting  bank  adds  no  strength  to  the  in- 
strument, since  the  accepting  bank  is  alreadj^  liable, 
primarily,  as  acceptor,  and  the  Federal  Reserve 
Board  in  Februar\%  1920,  instructed  Federal  re- 
serve banks  that  all  purchases  direct  from  the 
accepting  bank  of  bankers'  acceptances  bearing  no 
member  bank  indorsement  other  than  that  of  the 
accepting  bank  should  be  made  at  the  prevailing 
rate  for  commercial  paper  rather  than  at  the 
preferential  rate  applicable  to  bankers'  acceptances 
as  such. 


Open     Market     Transactions  163 

The  ten  per  cent,  limitation  on  the  discount  of  Discretion  of 

n  1  n  1,         i_        1      reserve  banks 

paper  or  any  one  borrower  lor  any  member  bank  to  apply 
'  does  not  apply  to  open  market  purchases.  In  view  ^.®  P*""  ""*• 
of  the  fact  that  an  acceptance  indorsed  only  by  the 
accepting  bank  is  supported  by  the  credit  of  only 
two  parties,  and  in  this  respect  is  like  a  customer's 
note  indorsed  by  the  bank,  the  Federal  Reserve 
Board  feels  that  a  Federal  reserve  bank  is  justified 
in  limiting  its  open-market  purchases  of  bankers' 
acceptances  of  this  character,  so  that  it  will  at  no 
time  hold  under  rediscount  or  purchase  from  one 
f  member  bank  an  aggregate  amount  in  excess  of  ten 
per  cent,  of  the  member  bank's  capital  and  surplus 
of  ( 1 )  notes,  drafts,  and  bills  bearing  the  signature 
or  indorsement  of  any  one  borrower,  and  ( 2 )  bank- 
ers' acceptances  made  by  the  member  bank  for  the 
same  borrower,  but  bearing  no  indorsement  other 
than  that  of  the  accepting  bank.  The  Board  has, 
however,  issued  no  ruling  upon  this  point,  and  for 
the  time  being  at  least  is  willing  to  leave  the  matter 
to  the  sound  banking  discretion  of  the  officers  of  the 
Federal  reserve  banks. 

(Ruling,  Federal  Reserve  Bulletin,  June,  1921,  page  699.) 


I 


APPENDIX: 

Acceptance  Powers  of  International  Financial 
Corporations 

ACCEPTANCES  OF  FEDERAL  CORPORATIONS 

Statutory  Provisions 

Each  corporation  so  organized  [for  the  purpose 
of  engaging  in  international  or  foreign  banking  or 
other  international  or  foreign  financial  operations, 
or  in  banking  or  other  financial  operations  in  a 
dependency  or  insular  possession  of  the  United 
States]  shall  have  power,  under  such  rules  and 
regulations  as  the  Federal  Reserve  Board  may 
prescribe  ...  to  accept  bills  or  drafts  drawn  upon  Acceptance* 
it  subject  to  such  limitations  and  restrictions  as  the 
Federal  Reserve  Board  may  impose;  to  issue  letters 
of  credit;  .  .  .  and  generally  to  exercise  such  other 
powers  as  are  incidental  to  the  powers  conferred  ''°^"* 
by  this  Act  or  as  may  be  usual,  in  the  determina- 
tion of  the  Federal  Reserve  Board,  in  connection 
with  the  transaction  of  the  business  of  banking  or 
other  financial  operations  in  the  countries,  colonies, 
dependencies,  or  possessions  in  wliich  it  shall  trans- 
act business  and  not  inconsistent  with  the  powers 
specifically  granted  herein.  Nothing  contained  in  this 
section  shall  be  construed  to  prohibit  the  Federal 
Reserve  Board,  under  its  power  to  prescribe  rules 
and  regulations,  from  limiting  the  aggregate 
amount  of  habilities  of  any  or  all  classes  incurred 
by  the  corporation  and  outstanding  at  any  one 
time. 

(Federal  Reserve  Act,  Section  25  (a).) 


166  Commercial     Banking     Practice 


Kinds 


Limitations 


Regulations  of  Federal  Reserve  Board 


Any  Corporation  may  accept  ( 1 )  drafts  and  bills 
of  exchange  drawn  upon  it  which  grow  out  of 
transactions  involving  the  importation  or  exporta- 
tion of  goods,  and  (2)  drafts  and  bills  of  exchange 
which  are  dravrn  by  banks  or  bankers  located  in  for-  i 
eign  countries  or  dependencies  or  insular  posses-  ' 
sions  of  the  United  States  for  the  purpose  of  fur- 
nishing dollar  exchange  as  required  by  the  usages 
of  trade  in  such  countries,  dependencies,  and  pos- 
sessions, provided,  however,  that,  except  with  the 
approval  of  the  Federal  Reserve  Board  and  subject 
to  such  limitations  as  it  may  prescribe,  no  Corpora- 
tion shall  exercise  its  power  to  accept  drafts  or  bills 
of  exchange  if  at  the  time  such  drafts  or  bills  are 
presented  for  acceptance  it  has  outstanding  any 
debentures,  bonds,  notes,  or  other  such  obhgations 
issued  by  it. 
i^jjjy^jy  Except  with  the  approval  of  the  Federal  Re- 

serve Board,  no  Corporation  shall  accept  any  draft 
or  bill  of  exchange  which  grows  out  of  a  transac- 
tion involving  the  importation  or  exportation  of 
goods  with  a  maturity  in  excess  of  six  months,  or 
shall  accept  any  draft  or  bill  of  exchange  drawn 
for  the  purpose  of  furnishing  dollar  exchange  with 
a  maturity  in  excess  of  three  months. 

(1)  Individual  drawers:  No  acceptances  shall 
be  made  for  the  account  of  any  one  drawer  in  an 
amount  aggregating  at  any  time  in  excess  of  ten 
per  cent,  of  the  subscribed  capital  and  surplus  of 
the  Corporation,  unless  the  transaction  be  fully  se- 
cured or  represents  an  exportation  or  importation 
of  commodities  and  is  guaranteed  by  a  bank  or 
banker  of  undoubted  solvency.  (2)  Aggregates: 
Whenever  the  aggregate  of  acceptances  outstand- 


Appendix  167 

ing  at  any  time  (a)  exceeds  the  amount  of  the  sub- 
scribed capital  and  surplus,  fifty  per  cent,  of  all  the 
acceptances  in  excess  of  the  amount  shall  be  fully 
secured;  or  (b)  exceeds  twice  the  amount  of  the 
subscribed  capital  and  surplus,  all  the  acceptances 
outstanding  in  excess  of  such  amount  shall  be  fully 
secured.  (The  Corporation  shall  elect  whichever 
requirement  (a)  or  (b)  calls  for  the  smaller  amount 
of  secured  acceptances.)  In  no  event  shall  any 
Corporation  have  outstanding  at  any  one  time  ac- 
ceptances drawn  for  the  purpose  of  furnishing  dol- 
lar exchange  in  an  amount  aggregating  more  than 
fifty  per  cent,  of  its  subscribed  capital  and  surplus. 

Against  all  acceptances  outstanding  which  ma-  Reserves 
ture  in  thirty  days  or  less  a  reserve  of  at  least  fifteen 
per  cent,  shall  be  maintained,  and  against  all  ac- 
ceptances outstanding  which  mature  in  more  than 
thirty  days  a  reserve  of  at  least  three  per  cent,  shall 
be  maintained.  Reserves  against  acceptances  must  be 
in  liquid  assets  of  any  or  all  of  the  following  kinds : 
(1)  cash;  (2)  balances  with  other  banks ;  (3)  bank- 
ers' acceptances;  and  (4)  such  securities  as  the 
Federal  Reserve  Board  may  from  time  to  time 
permit. 

(Regulation  K,  Series  of  1920,  XIII.) 

The  total  liabilities  to  a  Corporation  of  any  per-  Uabiiuies 
son,  company,  firm,  or  corporation  for  money  bor-  borrower 
rowed,  including  in  the  liabilities  of  a  company  or 
firm  the  liabilities  of  the  several  members  thereof, 
shall  at  no  time  exceed  ten  per  cent,  of  the  amount 
of  its  subscribed  capital  and  surplus,  except  with 
the  approval  of  the  Federal  Reserve  Board:  Pro- 
vided, however.  That  the  discount  of  bills  of  ex- 
change drawn  in  good  faith  against  actually  exist- 
ing  values    and    the    discount    of    commercial    or 


168 


Commercial     Banking     Practice 


AgfTcfate 
liabilitiss 


business  paper  actually  owned  by  the  person 
negotiating  the  same  shall  not  be  considered  as 
money  borrowed  within  the  meaning  of  this  para- 
graph. The  habihty  of  a  customer  on  account  of 
an  acceptance  made  by  the  Corporation  for  his  ac- 
count is  not  a  liabihty  for  money  borrowed  within 
the  meaning  of  this  paragraph  unless  and  until  he 
fails  to  place  the  Corporation  in  funds  to  cover  the 
payment  of  the  acceptance  at  maturity  or  unless 
the  Corporation  itself  holds  the  acceptance. 

The  aggregate  of  the  Corporation's  liabilities 
outstanding  on  account  of  acceptances,  average 
domestic  and  foreign  deposits,  debentures,  bonds, 
notes,  guaranties,  indorsements,  and  other  such  ob- 
ligations shall  not  exceed  at  any  one  time  ten  times 
the  amount  of  the  Corporation's  subscribed  capital 
and  surplus  except  with  the  approval  of  the  Federal 
Reserve  Board.  In  determining  the  amount  of  the 
Habilities  within  the  meaning  of  this  paragi-aph, 
indorsements  of  bills  of  exchange  having  not  more 
than  six  months  to  run,  drawn  and  accepted  by 
others  than  the  Corporation,  shall  not  be  included. 

(Regulation  K,  Series  of  1920,  XV.) 


Regulation 
of  business 


ACCEPTANCES  OF  STATE  CORPORATIONS 
Statutory  Provisions 

Before  any  national  bank  shall  be  permitted  to 
purchase  stock  in  any  such  corporation  [chartered 
or  incorporated  under  the  laws  of  any  state  and 
principally  engaged  in  international  or  foreign 
banking,  or  banking  in  a  dependency  or  insular 
possession  of  the  United  States]  the  said  corpora- 
tion shall  enter  into  an  agreement  or  undertaking 
with  the  Federal  Reserve  Board  to  restrict  its  ope- 
rations or  conduct  its  business  in  such  manner  or 


Appendix  169 

nder  such  limitations  and  restrictions  as  the  said 
oard  may  prescribe  for  the  place  or  places  wherein 
ich  business  is  to  be  conducted. 

(Federal  Reserve  Act,  Section  25.) 

Regulations  of  Federal  Reserve  Board 

The  Board  has  concluded  that  you  should  be  per-  CondiUons  as 
litted  to  accept  drafts  and  bills  of  exchange  upon  tusSs'"" 
le  same  terms  and  subject  to  the  same  conditions, 
mitations  and  restrictions  as  are  prescribed  in 
•aragraph  XIII  of  the  Board's  Regulation  K, 
eries  of  1920,  with  reference  to  the  exercise  of  the 
cceptance  powers  of  foreign  banking  corporations 
rganized  under  the  terms  of  Section  25(a)  of  the 
^ederal  Reserve  Act.* 

(Form  of  agreement  of  foreign  banking  corporation  as  a 
jndition  precedent  to  the  purchase  of  their  stock  by  national 
anks,  B.  1,  effective  February  23,  1921.) 

Opinions  and  Rulings 

Acceptances  of  state  foreign  banking  corpora-  Exemption 
ons  which  have  agreed  with  the  Federal  Reserve  5o7ercent. 
Joard  to  lunit  acceptances  for  account  of  any  one  '»nut 
rawer  to  ten  per  cent,  of  the  accepting  bank's 
apital  and  surplus,  unless  the  transaction  be  fuUy 
ecured,  are  not  subject  to  the  ten  per  cent,  limita- 
lon  where  the  acceptor  is  secured  by  the  acceptance 
f  the  foreign  buyer  after  the  release  of  the  docu- 
lents. 

(Ruling,  Federal  Reserve  Bulletin,  October,  1920,  page 
065.) 

*  See  above,  page  165. 


INDEX 

PAGES 

Acceptance   agreements,    duration    of 19-20,  38,  146 

Acceptance  before  sale  or  delivery 122 

Acceptance  corporations: 

Notes  of,  ineligible  for  rediscount 89 

Rediscount  of   acceptances   of 141 

Acceptance   defined    7 

Acceptance  powers  of   international   financial   corporations 165-169 

See  also  International  financial  corporations,  acceptance  powers  of 
Acceptances,  bank,  see  Bank  acceptances 
Acceptances,  trade,  see  Trade  acceptances 

Acceptances    without    documents 122 

Actually  existing  value: 

Evidence    of    123 

What  constitutes   66,  121-123 

Advances   by    Federal   reserve   banks 149-152 

Eligibility    of   notes,   drafts,    etc 150 

Indorsement   of  collateral 150 

Maturity    151-152 

Renewals   of  member  bank's   notes 151-152 

Security  for  advances  150-151 

Sunday  or  legal  holiday,  notes   due  on 151 

Advertising  space,  trade  acceptances  b?sed  on 117-118 

Agricultural  and  commercial  paper  distinguished 79, 126 

Agricultural  paper,   rediscount   of 125-133 

See  also  Rediscount  of.  Agricultural  paper 

Automobile  parts,   acceptances   covering  importation   of 20-21 

Automobiles  and  tires,  acceptances  based  on  domestic  shipment  of...  34 

Bank  acceptance  deiined 7, 134 

Bank  acceptances: 

Based  on  domestic  shipments  of  goods 32-42 

Aggregate  amount  bank  may  accept 39-42 

Amount  bank  may  accept  for  one  interest 39 

Character    of    transactions 32-37 

Eligibility   not   dependent  on   security   alone 32, 34 

Maturity    38-39 

Purchase   of   bank's    own    acceptance 41,67-68 

Release  of  documents  against  acceptance 36-37, 135-137 

Renewal   notes,  acceptance  of 38 

Shipment    without    sale 35, 39 

Shipping   documents    35-36 

U.  S.  Revised  Statutes,  section  5202,  not  applicable 41 

Based  on  imports  and  exports 11-31 

Acceptance  agreements  having  more  than  six  months  to  run..  19-20 

Acceptance  at   instance  of  exporter 15 

Acceptance  prior  to  purchase  or   sale 16-18 

Acceptance  secured  bv  documentary  drafts 16 

Acceptances  in  additi'  n  to  loans 27 

Aggregate  amount  bank  may  accept 28-31 

Amount  bank  may  accept  for  one  interest 21-28 

Character   of    11-19 

Coin    and    bullion,    acceptances    against 19 

Dealers  in  same  goods  for  export  and  domestic  sale 18 

Drafts  against  collateral  of  acceptances 15-16 


172  Index 

PAGES 

Bank  acceptances — continued 

Based  on  imports  and  exports — continued 

Exemption  from  ten  per  cent,  limit 23-28 

Export  contract  not  fulfilled 17 

Foreign  correspondents,  acceptances  of,  under  guarantee. ..  .22-23,  29 

Good   faith   a   test 11 

Identification  of  specific  goods  no*:  required 11 

Importers'  purchase  money  drafts 13 

Maturity    19-21 

Open   accounts,   acceptances   against 15 

Permission  to  accept  to     mount  of  capital  and  surplus,  appli- 
cation for   '. 28-29 

Proof  of  assurances  as  to  character 11, 13 

Purchase  of  bank's  own  acceptances 27, 30,  67-68 

Renewal    of    acceptances 20-21 

Secured  bills  exempt  from  ten  per  cent,  limit 23 

Security,  what  constitutes  actual 25-27 

Transaction  must  itself  involve  import  or  export 13-16 

U.  S.  Revised  Statutes,  section  5200,  relation  to  acceptances . .  27-28 

U.  S.  Revised  Statutes,  section  5202,  limitations  of 30 

Coverture   of    8 

Eligibility   of   bills    for    acceptance    in    relation    to    eligibility    for 

rediscount    8 

Executed  to  furnish  dollar  exchange 53-58 

Aggregate  amount  bank  may  accept 58 

Amount  bank  may  accept  for  one  interest 67-58 

Application  for  permission  to  accept 53,  55,  57 

Character    53-57 

Countries  whose  trade  usages  warrant  such  acceptances 56 

Maturity    57 

U.  S.  Revised  Statutes,  section  5202,  not  applicable 58 

Investment  in,  by  national  banks 64-68 

Acceptances  as  commercial  or  business  paper 66 

Actually  existing  value,  what  constitutes 66 

Bills  discounted   before   acceptance 66 

Bills  of  exchange  include  bank  acceptances 65 

Indorsement  for  accommodation 67 

Purchase  of  bank's  own  acceptances 67-68 

Rediscounted  paper  not  limited  by  section  5200 67,  68 

Reissuance   of   acceptances 68 

Issued    for    correspondents 59-63 

Agency  agreement   60-63 

Guarantee  of  letters  of  credit  hj  national  banks 59 

Liabilities  of  principal  and  agent 62 

Rediscount   of    134-148 

See  also  Rediscount  of,  Bank  acceptances 

Secured  by  warehouse  receipts 43-52 

Aggregate  amount  bank  may  accept , 52 

Amount  bank  may  accept  for  one  interest 52 

Bill  of  sale  not  eligible  security 50 

Character  of  transactions 43-51 

Control  of  warehouse  by  acceptor 47 

Eligible    security    45-49 

Foreign    warehouses    46 

Ineligible   security    49-51 

Maturity    51-52 

Readily   marketable   staples 43, 45 

Release  of  warehouse  receipts 135-137 


Index  173 


Bank  acceptances — continued 

Secured  by  warehouse  receipts— continued  ^^ 

Renewals     -, 

Security    not    specified 

Speculative   storage    

Substitution  of  warehouse   receipts oi 

Warehouse  receipts: 

Issued   by   independent  warehouses *o 

Issued    by    lessee *' 

Use  of   .„_ 

Bill  of  exchange,  derfinition  of ^^' 

Bill  of  sale,  not  eligible  as  security  for  bank  acceptance. .......  ...5U,l5y 

Bills  eligible  for  rediscount,  acceptance  of 8. 1J4-14.8,  IS^lOd 

Bills  of  exchange: 

Include   bank  acceptances inn  iii 

Negotiability ml 

Presentment  for  acceptance ^^' 

Rediscount   of    •  ■  •  •  107-124. 

See  also  Rediscount  of.  Drafts  and  trade  acceptances 
See  also  Open  market  transactions 
Building  operations,  eligibility  for  rediscount  of  acceptances  based  on         116 

Bullion,    acceptances    against 1^ 

Bullion  shipments,  acceptances  against,  eligible  for  open  market  pur- 
chases             1^' 

Capital  requirements,  drafts  to  finance 119 

Cattle: 

Acceptances  based  on  shipment  of 35, 140 

Notes  for  dairj',  eligible  for  rediscount  as  agricultural  paper 127 

Chattel  mortgages: 

Bank    acceptances    against ^"»  i*-* 

Promissory  notes  secured  by,  ineligible  for  rediscount  as   agricul- 
tural  paper    1^^ 

Security   for   agricultural  paper 127, 128, 132 

Cold  storage  companies: 

Notes  of,  ineligible  for  rediscount ^ 

Rediscount  of  paper  owned  by ^ 

Collateral  notes,  eligibility  of,  for  rediscount 76,  78,  84-85,  90 

Collateral   of    acceptances 15-16,  89 

Collection  charges,  bills  payable  with 91>  HO 

Commercial   and  agricultural  paper  distinguished 79,126 

Commercial  paper,  bank  acceptances  as 66 

Commodity  paper,  eligibility  of,  for  open  market  purchase 157 

Conditional  sales  as  basis  of  trade  acceptance 113 

Consignment  of  goods,  purchase  of  acceptance  against 168 

Cooperative  marketing  associations: 

Acceptances  of,  as  agricultural  paper 131 

Drafts  drawn   by 49, 141 

Cotton  broker,  rediscount  of  paper  of 100 

Cotton  factors: 

Acceptance  of  drafts  drawn  by ^^ 

Acceptances  of,  eligible  for  rediscount H''' 

Rediscount  of  paper  of 81-82,  90, 143 

Cotton-mill  paper,  rediscount  of 93 

County  warrants  not  eligible  as  collateral  for  advances 151 

Coverture  of  bank  acceptances ^ 


171  Index 

PAGES 

Definitions: 

Acceptance    7 

Agricultural    paper    125 

Bank   acceptance    7, 134 

Bill  of  exchange 107 

Draft    107 

Goods    19, 114 

Promissory  note    77, 78 

Readily   marketable    staples 43,  45 

Trade  acceptance   7,  111 

Demand  notes  and  drafts  ineligible  for  rediscount 95 

Demand,  notice,  and  protest,  waiver  of 107, 109 

Dollar  exchange    53-58 

See  also  Bank  acceptances.  Executed  to  furnish  dollar  exchange 

Dollar  exchange  drafts,  rediscount  of 137 

Pomestic  shipments,  bank  acceptances  based  on 32-42 

See  also  Bank  acceptances.  Based  on  domestic  shipments 

Domicile   bills    118 

Drafts: 

Accepted  by  foreign  correspondents  under  guarantee 22, 29 

Against   collateral  of   acceptances 15-16 

Defined     107 

Discounted   before   acceptance 122 

Rediscount   of    107-124 

See  also  Rediscount  of.  Drafts  and  trade  acceptances 

Drawee,  negotiability  of  bill  made  payable  to  order  of 110 

Electrical  installation,  drafts  based  on,  as  trade  acceptances 116 

Eligibility  for  acceptance  in  relation  to  eligibility  for  rediscount 8 

Eligibility  for  rediscount 

See  under  Rediscount  of  appropriate  class  of  paper 

Equity  exchanges,  rediscount  of  paper  of 83 

Extension  of  time,  note  or  draft 96 

Farm  loan  bonds  not  eligible  as  collateral  for  advances 151 

Farm  tools  and  equipment,  eligibility  for  rediscount  of  notes  for 12&-129 

Federal  reserve  banks: 

Loans  to  individuals  not  made 80 

Rediscounts   with    69-148 

See  also  Rediscounts  with  Federal  reserve  banks 

Fertilizer,  farmers  note  for,  as  agricultural  paper 127 

Finance  paper  ineligible  for  rediscount 75-76, 88-90, 119, 143 

Fixed   investments,   notes    for,   ineligible    for   rediscount 87,91,119,132-133 

Food  products,  rediscount  of  notes  secured  by 85 

Foreign  correspondents,  drafts   accepted   by,   under   guarantee  of  na- 
tional   bank    22, 29 

Foreign  transactions  as  basis  for  trade  acceptances 112 

Gas,  acceptances  based  on  sale  and  delivery  of,  eligible  for  rediscount. .         115 

Gold  coin,  acceptances   against 19 

Gold   coin   shipments,   acceptances    against,   eligible    for    open   market 

purchases     157 

Goods   defined    19, 114 

Holidays,  notes  due  on  legal 151 

Implement  dealers,  notes  of 125 

Importers'  purchase  money  drafts 13 


Index  175 


Imports   and  exports,  bank  acceptances  based  on 11-31 

See  also  Bank  acceptances,  Based  on  imports  and  exports 

Imports  on  docks,  renewals  against 21 

Indorsement •    104, 106,  139,  147-148, 150, 161-163 

Indorsement    for    accommodation 67, 147, 161 

Insolvent  bank,   rediscount   for,  when   reopened 85 

Installment  plan  sales,  acceptance  before  delivery  on 116 

Insurance  premiums,  drafts  in  payment  of 113 

International  financial   corporations,  acceptance  powers   of 165-169 

Federal    corporations    165-168 

Amount  corporation  may   accept 166-168 

Eligible  drafts  and  bills  of  exchange 166 

Liabilities  of  one  borrower 167-168 

Maturity   of   acceptances 166 

Reserves   against   outstanding   acceptances 167 

State  corporations    168-169 

Investment  in  bank  acceptances  by  national  banks 64^68 

See  also  Bank  acceptances,  Investment  in 
Irrigation  company: 

Farmer's  note  to,  as  agricultural  paper 130 

Eligibility  for  rediscount  of  paper  of 81, 130, 132 

Land  banks,  notes  of,  ineligible  for  rediscount 88 

Letters  of  credit; 

Duration  of  19-20,  38. 146 

Guarantee  of,  by  national  banks 59-60 

Limitations  on  amount  bank  may  issue 30-31, 41-42 

Letters  of  credit  and  acceptances  issued  for  correspondents 59-63 

See  also  Bank  acceptances.  Issued  for  correspondents 

Liberty  bonds,  see  U.  S.  obligations 

Limitations : 

Acceptances  for  one  interest,  see  under  appropriate  class  of  paper 
Aggregate  amount  bank  may  accept,  see  under  appropriate  class 
of  paper 

Agricultural  paper  rediscountable  by  member  bank 133 

Bank's  liabilities,  see  U.  S.  Revised  Statutes,  section  5202 
Loans  to  one  borrower,  see  U.  S.   Revised  Statutes,  section  5200 
Rediscount  of  paper  of  one  maker  or  indorser 97, 103, 121-123, 147 

Live  stock  paper  included  in  agricultural  paper 125 

Loans  to  individuals.  Federal  reserve  banks  do  not  make 80 

Loans  to  ten  per  cent,  limit: 

Bank  acceptances   in  addition  to 27 

See  also  U.  S.  Revised  Statutes,  section  5200 

Maturity,  see  under  appropriate  class  of  paper 

Minerals,  unmined,  not  regarded  as  quick  assets 94 

Mortgages,  see  Chattel  mortgages  and  Collateral  notes 

Motor  trucks,  rediscount  of  notes  based  on  purchase  of 82, 91 

Nonmember   banks,   rediscount    for 87, 104-106 

Notes,  promissory,  see  Promissory  notes 

Oil,  acceptances  based  on  shipment  of 34 

Open  accounts: 

Acceptances  in   liquidation  of ll''^»  122 

Assignment  of,  ineligible  for  rediscount 92 

Bank    acceptances    against 15 


176  Index 

PAGES 

Open    market    transactions 153-163 

Commodity  paper,  eligibility   of 157 

Eligible  paper   ' 157-158 

Indorsement    161-163 

Ineligible   bills   and   acceptances 158-159 

Maturity    160 

Promissory  notes   excluded 156-157 

Purchase    from    acceptor 162 

Purchase  of  acceptances   against  goods   stored 156 

Purchase  of  acceptances  based  on  foreign  trade 154 

Requirement  of  statements 159-160 

Ten  per  cent,  limit  does  not  apply 163 

Packing   company,   note   of,   ineligible    for    rediscount    as    agricultural 

paper    131 

Pig  iron,  rediscount  of  notes  secured  by 85 

Place  of  paj-ment  of  trade   acceptance' Ill 

Preferential    rates    15q 

Promissory  notes: 

Advances  by  Federal  reserve  banks  on 149-152 

See  also  Advances  by  Federal  reserve  banks 

Ineligible  for  purchase  in  open  market 156-157 

Rediscount  of    77-106 

See  also  Rediscount  of,  Promissory  notes 
Purchase  of  bank  acceptances: 

By  member  banks    64-68 

See  also  Bank  acceptances.  Investment  in,  by  national  banks 

By  reserve  banks * 153-163 

See  also  Open  market  transactions 

Railroad  supplies,  rediscount  of  acceptances  based  on  sale  of 115 

Rediscount  for  insolvent  bank  when  reopened 85 

Rediscount  of: 

Agricultural   paper    125-133 

Amount  rediscountable  by  a  Federal  reserve  bank 133 

Chattel  mortgages    127,  128, 132 

Definition  of  agricultural  paper 125 

Discount  may  be  by  either  maker  or  indorser 129 

Eligible    agricultural    paper 126-131 

Identification  of   agricultural   paper 131 

Ineligible   agricultural   paper 131-133 

Payable    to    bank 130 

Bank    acceptances    134-148 

Acceptance   corporation,    acceptances   of 141 

Amount  rediscountable  for  one  member  bank 146-147 

Chattel   mortgages    not   eligible    security 143 

Definition  of  bank  acceptance 134 

Eligible   acceptors    134 

Eligible    bank    acceptances 135-142 

Evidence   of  eligibility 144-145 

Exchange  in  import  transactions 138 

Indorsement    139, 147-148 

Ineligible    bank    acceptances 142-143 

Maturity    145-146 

Negotiability,   conditions    of 134-135 

Option    to    rediscount 141 

PajTnent   at   maturity 142 


Index  177 

PAGES 

Rediscount  of — continued 

Bank  acceptances — continued 

Renewals    1'*^ 

Shipping  documents  to  be  furnished 137 

Warehouse  receipts  as  security 14^ 

Drafts  and  trade  acceptances 107-124 

Actually  existing  value,  what  constitutes 121-123 

Aggregate  amount  rediscountable  for  one  bank 124 

Amount  of,  of  one  interest  rediscountable  for  one  bank 121-123 

Definitions     10'''»  m 

Eligible  drafts  and  trade  acceptances 113-118 

Evidence  of  eligibility 120-121 

Extension  of   time. 10''^ 

Foreign  shipments,  acceptances  based  on 112 

Future  purchases,  acceptances  based  on 112 

Indorsement  of  member  banks 124 

Ineligible  drafts  and  trade  acceptances 118-120 

Maturity    121 

Negotiability  of  drafts  and  trade  acceptances 109-111 

Nonmember  banks,  rediscount  for 124 

Qualified   acceptances    109, 123 

Stamp  "trade  acceptance"  has  no  value 120 

Promissory  notes    77-106 

Aggregate  amount  rediscountable  for  one  bank 103-104 

Amount  of  one  interest  rediscountable  for  one  member  bank. .   97-103 

Collateral   notes    84, 90 

Commercial  and   agricultural  paper   distinguished 79 

Definition  of  note ''^'^ 

Demand    notes    ineligible 95 

Eligibility  tested  by  use  of  funds 84 

Eligible    classes    of    notes 77-87 

Evidence   of   eligibility 92-94 

Indorsement  of  member  banks 104 

Ineligible  classes  of  notes 87-92 

Maturity    94-96 

No  obligation  to  rediscount  eligible  paper 79-80 

Nonmember    banks,    rediscount    for 87,104-106 

Nonnegoti-.ble  paper   91-92 

Notes  payable  before  certain  date 95 

Renewal    notes    82, 87 

Secured   notes    83-86 

State  member  banks,  rediscounts  for 97,  99, 101-103 

U.  S.  obligations,  notes  based  on  or  secured  by 86-87, 9&-99 

Rediscounted  paper  not  limited  bv: 

U.  S.  Revised  Statutes,  section  5200 67,  68, 101 

U.  S.  Revised  Statutes,  section  5202 103 

Rediscounts  with  Federal  reserve  banks 69-148 

Applications   for   rediscount 76 

Eligibility  of  notes,  drafts,  and  bills  of  exchange 75-76 

Reissuance    of    acceptances 68 

Renewal  drafts,  acceptance  of 20-21,  38,  51 

Renewal  notes,  discount  of 82,  87, 146 

Renewal  of  member  banks'  notes  for  advances 151-152 

Reserves  of  international  finanjial  corporations 167 

Retail  transactions  as  basis  for  trade  acceptances 116 

Sales   corporations,    acceptances   of 115 


178  Index 

PAGES 

Security: 

Custody  of   24,  36, 138 

Eligible  for  bank  acceptances 43-49 

AVhat  constitutes  actual 25-27 

Stamp  '"trade  acceptance"  has  no  value 159 

Staples,  readily  marketable,   defined 43, 45 

State  member  "banks,  rediscounts   for 71,74,97,99,101-103 

Statements,  requirement  of 92-93, 120,  159-160 

Sugar  in  bond,  acceptance  of  drafts   against 48 

Sunday  or  legal  holiday,  notes  due  on 151 

Timber,  standing,  not  to  be  regarded  as  quick  asset 94 

Trade  acceptance: 

Actual    security    26 

Defined     7, 1 1  ] 

Open    market    transactions    in 153-163 

See  also  Open  market  transactions 

Rediscount  of    107-124 

See  also  Rediscount  of.  Drafts  and  trade  acceptances 

Trust  notes,  ineligible  for  rediscount 90 

Trust  receipts  as  actual  security 25-26 

U.  S.  obligations: 

Eligible  collateral  for  member  banks'  notes 149, 150 

Notes  to  replace  funds  for  purchase  of,  ineligible  for  rediscount..  88 

Rediscount    of    paper    secured    by 71,  74,  77,  86-87,  98-99, 114 

U.  S.  Revised  Statutes,  section  5200  (ten  per  cent,  limit  on  loans)  ..  .27-28,  64 
Not  amended  bv  Federal  Reserve  Act,  section  13 101 

U.  S.  Revised  Statutes,  section  .5202  (limit  on  liabilities  of  bank)  .  .30,41,  58, 103 

"War  Finance  Corporation  bonds: 

Advances  on  member  banks'   notes  secured  by 149 

Rediscount  of  paper   secured   by 72,  78, 114 

War  savings  stamps: 

Drafts  to  finance  purchase  of 120 

Paper  secured  by,  ineligible   for  rediscount 88, 120 

Warehouse  receipts: 

Bank   acceptances   secured   by 43-52 

See  aUo  Bank  acceptances,  Secured  by  warehouse  receipts 

Issued   by   independent   warehouses 46, 140 

Issued  bv  lessee 47 

Release   of    37, 51, 13-5-137 

Substitution  of    51 

Waterworks  company,  paper  of,  eligible  for  redis'^ount 80 

Wine  in  bond,  drafts  against,  ineligible  for  rediscount 120 

Wool,  receipt  of  custodian  of,  as  warehouse  receipt 48 


National  Bank  of  Commerce 

in  New  York 

Established  1839 

Capital,  Su 

rplus  and  Undivided  Profits 

Sixty  Million  Dollars 

President 

James   S.    Alexander 

Vice-Presidents 

Herbert    P.    Howell 

J.   Howard  Ardrey 

Louis   A.    Keidel 

Faris   R.   Russell 

Joseph  A.  Broderick 

David  H.  G.  Penny 

Stevenson  E.  Ward 

Guy  Emerson 

John    E.    Rovensky 
Second  Vice-Presidents 

Roger  H.  Williams 

Harry    P.    Barrand 

Archibald  F.  Maxwell 

Edward  H.  Rawls 

Louis    P.    Christenson 

Franz  Meyer 

Everett  E.  Risley 

James    I.    Clarke 

Cashier 
Roy   H.    Passmore 

Assistant  Cashiers 

Henry  C.  Stevens 

Ira  W.   Aldom 

John  J.  Keenan 

Eugene   M.    Prentice 

Emanuel   C.   Gersten 

Walter   E.   Lovblad 

Henry   W.    Schrader 

Gaston    L.    Ghegan 

Don   L.   Moore 

Hamilton  G.  Stenersen 

W.    Sproull    Graves 

Alfred   J.   Oxenham 

Edward    Vanderpoel 

Elmore    F.    Higgins 

Julius    Paul 
Directors 

Jolui   T.  Walker,  Jr. 

JAMES  S.  ALEXANDER 
JOHN  W.  DAVIS 
WILUAM  A.  DAY 
HENRY  W.  de  FOREST 

FORREST  F.  DRYDEN 
CHARLES  E.  DUNLAP 
HERBERT  P.  HOWELL 

VALENTINE  P.  SNYDER 
HARRY  B.  THAYER 
JAMES  TIMPSON 
THOMAS  WILLIAMS 

.^   orr  T^^-  ^-^ 


M 


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v-:^v: 


r 


National  Bank 

OF  COMM  :i:RCE 

IN  NewYo  IK 


CapitalSurplus 
and  Undivided  Profits 
SixU/MillionDollars 


